Q2 2020 Earnings Call
Please continue to stand by your conference will begin shortly once again, we thank you for your participation and I thought you. Please remain on the line.
[laughter].
[noise] good day, ladies and gentlemen, well come to this T second quarter Conference call. Please be advised said this call is being recorded I would not much of trying to meeting over to Mr. Andrew Arnovitz. You May now proceed mr. on <unk>.
Good afternoon, everyone and thank you for joining us today before we begin I'd like to remind you that today's remarks, including management said look for fiscal year 20, and answers to questions contain forward looking statements. These forward looking statements represent our expectation that just today November 13, 2019, and accordingly are subject to change such statements are based.
I'm assumptions that may not materialize and are subject to risks and uncertainties actual results may differ materially and listeners are cautioned not to put undue reliance on these forward looking statements.
A description of risks factors and assumptions that may affect future results is contained in Cds annual Mdna available our corporate web site in our filings with the Canadian Securities administrators on SEDAR.
And with the U.S. Securities Exchange Commission on Edgar.
On the call with me this afternoon or Macau cease President <unk>, Chief Executive Officer, and Sonya Branco, our Chief Financial Officer.
After remarks from markets Onea, we'll take questions from financial analysts and institutional investors.
Following the conclusion of that you in a period, we'll open the line called for members of the media.
I'd now turn the call over to Mark.
Thank you Andrew and good afternoon, everyone joining us on the call.
I'll first discuss some of the highlights for the quarter and then Sonya will review the detailed financials.
I'll come back at the end to talk about our outlook.
He had good growth in the second quarter, what revenue up 21% segment operating income up 28% and we secured nearly $1 billion of orders for a 1.11 times book the sales ratio.
She's total backlog at the end of the quarter was $9.2 billion.
[laughter] performance continued to be led by simple, which delivered very strong operating income growth higher margins. They continue to have strong order intake.
The integration of the bump RT business aircraft training acquisition has gone very well.
It is substantially complete.
We're continuing to win the confidence of our airline its business jets customers, what our expanded and highly innovative training solution.
The best performance improved from last quarter. However, it reflects continued delays, but he didn't delays of orders for our higher margin defense products and the tiny a program milestones about contracts that were currently working on from backlog.
These are largely timing issue said I'm encouraged by the 1.0 wait times book the sales ratio for the quarter, which gets caught finish toward a stronger second half in defense.
And in health care, our expanded Salesforce secured a higher level of interest in our latest products, which will begin delivering over the next few quarters.
Looking more closely it's simple.
We booked $603 million on orders in Q2, excuse me, putting new long term training a agreements with some suddenly airline loganair and flight works.
We also sold 11 full flight simulators during the quarter for total 20 for the first half of the years.
To address the global demand for new pilots, we launched a new could that pilot training program to train more than 700, and you professional pilots over the next 10 years for southwest Airlines destination to 25 program.
And just this week, we signed a long term exclusive trainee agreement, we easy just to train more than a thousand and you easy jet Kid Palace under a multi crew patent license program.
Also involve easy jet, we inaugurated new training facilities during the quarter at Gatwick, Manchester and Atlanta in support of our comprehensive tenure training agreement.
In business Aviation, we entered a strategic partnership and exclusive 15 your training outsourcing with Directionally you should capital any facilities.
Directional is one of the largest fastest growing in the most innovative corporate aviation service companies globally.
And in connection with disagreement just last week.
We concluded the acquisition over 50% stake is Symcom holdings.
Overall training center utilization was 69% this quarter on our network of nearly 300 full flight simulators.
Airlines train a bit less during the busy summer travel much I would use this opportunity of this than usual seasonality to perform some similar up they say relocations.
Incident with the opening of our Q3 training centers during the quarter.
Utilization rate also reflects the fact that some of our recently added capacity. That's just beginning now to ramp up.
The defense, we booked orders for $362 million, including KC 135, aircrew training services and similar upgrades for the U.S. Air Force.
And additional fixed wing flight training and support services for the U.S. Army at the she Dolsten training Center.
We also received orders to upgrade the west navies at least 60 seahawk helicopter simulators.
To provide aircrew training on the Navy's T 44, she aircraft.
Other notable orders include a contract with Boeing to provide upgrades on P. Eight eight simulators a contract upgrade the German eurofighter and tornado aircraft simulator and a contract for Abrams tank made this trainers for the United States Army.
As well to further bolster our positioning in the United States, We entered a strategic collaboration with me on our offer integrated helicopter training solutions together.
And it health care.
We continue to pursue larger segments of the health care simulation market with our expanded sales force.
Inline with our strategy to expand our reach within hospitals, we've entered into an agreement with Premier leading health care improvement company a language approximately 4000, U.S. hospitals and health system.
We also launched new products, including Vinay Ics three point ultra shelf simulator and together with the American Society of Anesthesiologist.
We launched a new anesthesia since that module, which is latest in a series of interactive screen based courses to prove for maintenance for certification and added physiology credits.
With that I'll now turn to call over to Sony I'll provide a detailed look at our financial performance I'll return at the end of the called comment on rail but.
Thank you Mark and good afternoon, everyone.
Elevated revenue for the second quarter with $896.8 million of 21% compared to 742.8 million dollar in a second quarter last year and segment operating income before specific I am with $126 million of 20% from 98.7 million last year.
Quarterly net income before specific items was $74.7 million or 20 cents per share, which is 22% higher than the 23 cents. We recorded in the second quarter last year.
Net finance expense for the second quarter was $34.3 million up from $19.9 million in the second quarter of the fiscal 2019.
Higher interest, resulting from the long term debt that we issued at the end of last year higher interest on lease liabilities because of the adoption of my for Essex team as well as higher investment in noncash working capital in the first half of it here.
Income taxes, this quarter was $15.5 million, representing an effective tax rate of 17%, which is down from 19% for second quarter last year. The lower tax rate was mainly due to a change in the mix of income from various jurisdiction.
Free cash flow and negative $7.1 million in the quarter compared to positive $137.7 million last year.
Cash provided by operating activities increased compared to second quarter last year, while free cash flow decrease mainly from higher investment in noncash working capital accounts.
Most of the increases timing related as we usually see a higher investment in noncash working capital accounts in the first.
This increase reflects the timing of cash flows involving accounts payable and contract liability. It also reflects higher inventory. Some recent strategic investments in simulator at backfill the preempts customer demands that we anticipate for certain simulator product.
As in previous years, we expect a significant portion of the noncash working capital investments typically the first in the second half.
Uses of cash into two including funding capital expenditures for $58.8 million, mainly for growth and specifically to add capacity toward mobile training network to deliver on the long term exclusive training contracts in our backlog.
We continue to expect total capital expenditures for the year to be about 10% to 15% higher than in prior year.
Other uses of cash include the distribution $20.4 million in cash dividends.
Use another $18.2 million to repurchase stock at a weighted average price of $34 in six cents per common share on the VNC IB program.
Our financial position continues to be solid wood, a net debt of $2.4 billion at the end of the quarter for a net debt to capital ratio of 51%. This reflects the issuance of the unsecured senior notes at the bump on the back this acquisition and the higher uses of cash to fund working capital in the first half of the year.
Since we adopted I aggressive seen effective April 1st 2019 net that now also includes obligations under these contracts, which were previously accounted for as operating leases and therefore not included index.
Putting this in fact, the net debt to capital ratio would have been 47.5% this quarter.
We continue to expect to be at the lower end of our target leverage range, which is 35% to 45% on a pre I first basis within the next 18 to 30 miles.
Return on capital employed before specific items and excluding the impacts of high for 16 was 11.7% this quarter compared to 12% last winter and 12.8% last year as we wrap up the large somebody that business acquisition and our go other growth investments, we expect to reach 13% return on capital employed by fiscal year 2000.
22.
Now looking at our segment performance and said well, we have strong double digit organic growth in the second quarter and in addition, we benefited from the integration of the from BARDA NIAID business aircraft training business, which also performed very well second quarter revenue was up 35% year over year to $529.9 million on 18 full flight simulators.
Livery and continued strong demand for our training services with our offended.
Operating income before specific items was up 60% $101.4 million for a margin of 19.1%.
On the order from the civil booked a sales ratio for the quarter was 1.14 times and put a trailing 12 month period. It was 1.45 times.
And then second quarter revenue of $336.5 million was up 5% over Q2 last year, well operating income was down 24% to $26 million for an operating margin of 7.7%.
And defense product margins are typically higher and services and why we did see a more balanced mix compared to last quarter was still more weighted concern is.
The lower segment operating income in the second quarter also reflects delays on product orders. We expect this includes the [laughter] as well as timing related factors, leading to reaching program milestones within the product contracts in our backlog. These include our execution on R&D program and external factors, including cousin ramp up and the readiness of their training.
Really.
The defense them to sales ratio was higher this quarter and 1.08 times and 1.81 times for the last 12 months.
Lastly, in healthcare second quarter revenue of $30.4 million less stable compared to Q2 last year and segment operating loss was $1.4 million in the quarter compared to segment operating income of $1.3 million due to you had a higher investment S. You need to support our largest future business and we also had some higher expenses related to launch a new product.
With that I'll ask mark to discuss the wasteful.
Thanks on yet.
We continue to seek good momentum with our trading strategy, which is supported by secular growth trends across all of our markets, which underpins season investment thesis.
It's still the market fundamentals for commercial aviation remain supportive.
We continued long term passenger traffic growth.
And expanding global in service fleet of aircraft and specific to our business as significant need to attract and create new pilots to meet long term demand.
She is a world leader in civil Aviation training and as a brand it's become synonymous with training and increasingly with pilots.
We're making very good momentum in a larger addressable market and as we look ahead.
We expect to see more airline outsourcing opportunities materialize from a large pipeline along current trading partnership.
We expect another good year for full flight simulator sale and to maintain our leading share market.
In business aviation, we significantly more short position with the successful integration of Bharti business Aviation training and what our recent strategic partnership with directional aviation capital.
In this market segments Si business is driven mainly by the ongoing trainee requirement that involved they are already in service fleet of business aircraft globally.
Well, so expect to benefit from demand for training involving the entry into service of major large cabin business Jets.
For civil overall, we expect to perform at this better than our original outlook now with operating income growth closer to 30% for the year on strong demand for our train solutions as underscored by a 1.4 times trailing book to sales ratio and it continued high ratio going forward.
Even on a growing revenue base.
And defense, we continue to expect a stronger second half, which is a view supported by a healthy book to sales ratio in the quarter and robust pipeline.
Our revised outlook for modest growth for the year takes into account our progress year to date and our current expectations for reaching milestones on programs in backlog.
We also expect to conclude several more contracts in the remainder of the year.
We don't control the timing of government decision, making.
Take confidence and knowing that we've already been down selected for most of them.
Our long term prospects in the large addressable defense market remains positive and I'm encouraged by approximately $4 billion of defense proposals. We already written that are currently in the hands of customers pending decisions.
Finally.
As previously announced with use of gene called the key fill this upcoming required the retirement.
We're actively the process or recruiting a new group president who will be responsible for our defense broke strategy and execution in our global market.
And lastly, and health care.
I'm encouraged by the potential proceed to leverage our leadership in aviation training and make health care safer.
We're positioning the business to leverage the growing opportunities with hospitals, which now have major incentive in the United States, specifically to address preventable medical errors and they see simulation as a logical way to ensure their practitioners are adequately trained in procedures.
The increase comparative on patient safety recently highlighted in no small way by the World Health organization.
Eating the world first patient safety is this one important factor to gives me confidence in the long term prospects for she in this market.
We're continuing to roll out the most innovative products in the market and would have strengthened front end organization a new team in place we continue to expect double digit percentage growth this year.
In summary, our overall look for see this fiscal year is largely unchanged. We expected higher growth is simple offsetting the lower expected growth in defense.
Would benefit from a strong position at secular tailwinds each of our core markets and we look forward to superior top and bottom line growth in the years ahead.
With that I. Thank you for your attention and we're now ready as your question.
Thanks, Mark operator, we'd now like to open the lines to members of the financial community.
Thank you.
If you would like to register a question. Please press the one follow up about a four on your telephone you will hear a treat tone from towards knowledge. Your request. Joe question has been answered and you would like to withdraw your registration. Please press star one followed by just three one moment. Please for the first question.
Our first question coming from the line of calling our Gupta with Scotia Bank. Please proceed with your question.
Hi, This is amina corner group does associates I do have a question on the defense segment, you size, the Guy a guidance, which implies a strong EBITDA growth in the second half do you expect growth to be skewed in the third quarter to fourth quarter as well should revenue growth accelerate that the same time as you.
Fleet orders materialize in second half.
Well I think that we're guiding on the the outlook for.
The goal for the business inline with what we've talked as following their remarks, and yes, we expect a stronger.
Yes, yes, two three and Q4 in that in.
By more to 42, three but overall, we expect much stronger second half as you would expect to be able to as you said achieved the the modest growth that we highlighted.
Our outlook for sure.
I do have a question on working capital or do you expect a reversal in working capital and the third quarter and are there any other onetime which this year that wouldn't try on to working capital changes next year.
So, let's so and I see historically, there's there's usually oh and invest in a higher level investments in the first half the year noncash working capital accounts and usually see a partial reversal in the second half and and that's no different than here, we don't really call. It out on a quarterly basis, we look at this on it on.
An annual basis.
And a lot of that investment with higher lots are driving.
And frankly timing impact on accounts payable and contract liability, but in addition, we've called out higher deliberate investment in inventory. Some of it is work in progress inventory that and that inventory to take to customer orders and deliveries, which is in line with ours. Our view on expected deliveries, which is higher in the second half.
But we've also invested deliberately on some pre build so some white tails to address expected demand. Most of these are 737, Mac simulators and when the situation and timing of aircraft deliveries or clarify.
Vision to address that that customer demand.
Okay.
Operator.
Thank you can hear me now.
Yes.
Sorry, I do have a question on the civil segment.
What what did the cadence for to stimulate or deliveries for the next few quarters and do you expect EBITDA growth in the second half to be driven by joint ventures or can we expect material margin expansion to take place in the first half that took place in the first half.
Just start with deliveries I think we don't expect the.
The market drivers the difference that with regards to simulator sales, which are basically.
The kind of the strong catalyst as delivery of aircraft out of the Oems and the notwithstanding I think you only at the baby a if you like an all believe this market right now is the delayed deliveries of 737 axis, whether or not I think the there's always expect that the markets.
We'll be different and we're not seeing that we're seeing the simulator orders in line with as I said delivery of aircraft studies for US anyway, you want to.
On your question on EBITDA alternately our revised I think our revised outlook a speaks to our view on operating income that little higher than what our previous outlook.
With operating income growth coming closer to 30%.
Thank you.
Our next question coming from the line of Kevin Chiang would see Ibcs. Please proceed with your question.
Hi, This is Chris <unk> on for Kevin If I could just go back to defense, you're calling for a strong second half and just wondering how this plays into 2021, I know you're not providing guidance, but any reason not to expect the growth rate in defense to return to normalized level.
Well I think I don't think we've already called on normalized levels that we specifically we've called out an outlook every year, but yes. It was continued good growth on the in defense because it just because the market fundamentals are positioned to market in the demand for services and probably most importantly on the pipeline of opportunities that we see it.
As I mentioned, we have about 4 billion of proposals that we submitted the customers.
Already sold those as I will say, we don't control the pan of decision makers as to when they decide but.
I think though.
A lot of them will materialize in the next few months. So that gives me confidence in our own prospects in a market and when you look as well as.
The market itself market itself is growing and we continue to expect to exceed the organic a marker goal for the longer term in defense.
Great. Thanks, and if I could also just asking another one of with the addition of somebody's assassination training assets and the strategic partnership with directional how does that shift on the mix of what hours and dry hours versus what we've seen historically.
Well I don't have the numbers based on it hasn't been Noelle, we do but clearly.
Hi, Marty is essentially all assess del Webb, so clearly it will increase the amount of wet hours, we do.
Yes business aviation represents about a third of our civil activity Christa, it's all wet and the commercial activity that we do better.
Probably about a third of it as well and growing.
Perfect. Thank you and then if I could just ask one on health care margins have been impacted by elevated costs related to growth and launching new products. When do you think you'll lap these costs and should we expect this for the remainder of fiscal 2020.
Well I think we expect it to reverse which continue to increase this year at testimony by our outlook for double digit growth, obviously, though that implies a strong second half and thats, what we see in front of us.
Perfect. Thank you.
Thank you.
Our next question coming from the nine have been what Wahid Windisch All bank capital markets. Please proceed with your question.
Yes, good afternoon, everyone.
Could you provide more color with respect to the civil guidance has been revised upward on what are the main drivers for the guidance increase.
Well I think its performance year to date seven away.
And your orders going forward. If you look at the as I mentioned just turned the order the trailing book to Bill is 1.45 on top of quite exceptional revenue growth. So even though were.
Well, we're growing a lot we're just continuing to fill the pipeline quite quite substantially.
And so that.
So we always capacity, we have would not capacity limited. So we can see that we're going to be able to generate more business and the associated profit in the second half that's a large part of the other parts that we've been very happy with the integration of our bombarding business jet.
Business.
Business, where I think were odyssey firing on all cylinders, there and so.
We feel confident in the second half of our set business.
So that's really what will come at problems to be able to get to confidently increase outlook.
Okay. That's perfect marks and are you confident to still deliver a similar number of a full flight simulators. This year comparable to last year, which was around 58 Mark.
Livearea, though a spinoff yeah, yeah yeah.
Yeah, So what we see is that.
It will be.
Higher in the second half of it was last year I, probably in the 15th and that's been incorporated into our outlook.
And our outlook of closer to 30% operating income growth year over year.
Okay, perfect and could you provide an update on those 737, Max whether you have more or color on the upcoming training requirement and the impact so far we've seen force yes.
Not really we don't have anymore, because the I mean, the aircraft has returned to service. So I think we don't know.
Nor does anybody else exactly what the training requirements will be.
I think its oh in terms of our our our physician that were cutting to support the operators in this portfolio and.
The regulators reset that you know that that we that they want.
Our sport in all jurisdictions so.
Our assumptions that there obviously is going to be a lot of ends up the balance as everybody to start flying that emphasizes that number of white tails that we've created to be able to secured at the man and also sales continue to do well.
Of the Max escalators and delivery vehicle element. So far this year. If you look at maybe remind you the numbers et cetera. So five orders to date and delivered nine deliveries today on the 73000, Matt and expect a similar number in the second half as well and it all those guys. We've sold 40 873 have Max's.
So far that the majority of market share so.
Hopefully the airplane will fly again relative in the near future with will well position when that happens.
Okay, that's great color, Mark and with respect to do utilization rate the a 3% decline year over year or is it fair to say that it was mostly driven by the.
Position of Bob that typically aware business.
At the utilization is typically lower given the nature of the business Mark that's that's that's certainly part of it.
There's a normal seasonality as you know, but I mean, even if you look at last year's 72%. Some of it is what you said bids that got for sure because.
We.
Well trained and May nine hours out however, I would caution that we don't assume that until we get SMB a utilization we don't necessary assume.
Full utilization like that on a business aircraft love It has to do as well with.
Remember, we know we opened up three new.
Training centers Midland Manchester got weak so we relocated a bunch of simulators and updated with taking advantage of this summer month updates.
Here's what we're doing that either and transit or an update there not earning revenue and they're not they're part of that a utilization. So as some of it you know Sept 37 pilot frame deferral. So all of that as they gives you the us.
69%, which which to me.
It's not to it's not surprising whether we everything we've done this quarter.
Okay. That's perfect one last one for me a song Youre in terms of working GAAP you expect a good reversal in the second up but in terms of working capital usage for fiscal 2000 could you provide may be a range were what what kind of dollars. We could expect for the full year in fiscal 2000.
Sonya.
Well listen this is late we expect a significant part of that to reverse in the second half. So so that will be as we kind of continue to optimize noncash working capital conversion that inventory investment in the second half.
But we will have some investment oh, one some of that inventory won't necessarily were converted completely.
And before March 31st, but also as we continue to see strong growth on the services side.
That services model drives drives the investment in a are which is which as usual because the services gets billed and collected after the services are under so well monastery give a range, but it's a it's a substantial portion will be reverse in the second half.
Okay. Thank you signed out thank you.
Thank you.
Our next question coming from the line of Faddish among would be a more capital markets. Please proceed with your question.
Hi, Thank you for taking my question.
Maybe first on.
Quickly on a directional aviation.
Can you offer up kind of how you think about the contribution you'd expect from this once you close it is it kind of consistent with what would be attributing kinda otherwise see for this business like.
No low double digit Oh, I see basically on that 85 million is that fair.
Wait to think about it.
Well I'd start by saying, maybe a slightly accretive we expected to be slightly accretive and then in the next 12 months as we open up our new trade center and we start populating. It was simulators as we go through the integration and do something went out yeah, I know I think that.
Really begins to take last year to year three and beyond.
The biggest value in that study is really the 15 year exclusive with directional which is a really large.
Fleet in aggregate with all its affiliates is 175 business jet aircraft. So it's almost like a really large airline outsourcing so for us.
The the returns really begin to add to take full year, two three and beyond first full year will be.
The sort of modestly accretive.
Okay and then if there is that any contribution assumed for this year from a directional.
It's very small and it's it's already in the near 30% growth outlook that we provided.
Okay.
My second question on defense.
I mean, I can I appreciate the lumpiness quarter over quarter, and just kind of things, but if I take a look at the last few years into funds.
The you have had a very strong and movement than revenues you've deployed over 200 million of capital in that division, but the incrementals have been kind of low single digit both in terms of throwaway can on margin.
Can you offer up any kinda.
I'm going to insights into what's what's really.
On a driving this is it all makes.
And whether there's an opportunity.
Ken can improve over the next couple of years I guess, if these are program that out and all your ramp up stage.
I think maybe I'll, just a high level that definitely.
I think what you've seen in a large.
The macro level is increasingly a shift.
The service and the products services mix has changed and that's caused a lot of that the you know should the lower margins overall now going forward.
I would tell you that you know we stick to argue that we should be able to delivered 11, 12% range that that would be our expectations the longer term and that's adding in terms of accretive to your return to see so certainly not dilutive and contributing to through value creation. That's that's our position.
That's the way we're bidding in the market.
If you want to.
Yes, it really or is a reflection and a transition between the products and services mix, but as as you grow the size scope on services and drive the product programs.
It's a will drive higher margins and contribution on return.
Okay, Great and maybe one one lost a question.
Oh, you Ah that's to share how many white they'll have your belt for marks or.
Well I'd be county, we will have the whatever the number we think thats competitively sensitive competitively sensitive but maybe.
No I was going to same same that so not [laughter]. So no no [laughter] okay. Thank you.
Okay.
Thank you.
Our next question coming from the line of Cameron Doerksen with National Bank Financial. Please proceed with your question.
Yes. Thanks. Good afternoon, just a follow up on May seven through seven Maxim and though the white tails I mean I.
I guess, maybe I'm reading too much into this but the fact that.
You may be built some white deals I'm just going back Sims is that suggested that maybe airlines are telling you that they might have a requirement for new Sims as opposed to using their existing 737 and GE Sims.
Well I think.
Well look I'll tell you I think it's prudent to say that you know you have a both up three seven that operators and a lot of a lot of airplanes sitting on around right now and they're going to have to come up to come up to speed and the garden penetrating and you just don't ramp that up overnight. Okay. So we want to be there.
Being able to support all that the man.
And the long term prospects of the surpassing very good both boys that are very strong backlog of aircraft. This will get fixed in the into short term. So we want to be ready and we're taking assumptions with regards to what's going to happen what jurisdiction.
But.
I think we have no crystal ball anymore did you do.
Hey, we that we would share we would share our assumptions.
What trade will be gone, but no customers aren't guiding has a one we are another at least the our experience though is that airlines rarely do just what they are the minimum that regulators will ask us. So we fully expect that as it has already happened somewhere even even should the.
Train with pharmacy exactly the same as before I fully expect that some airlines a lot of airlines will move beyond that because they'll want to have dedicated to 77 axis players for their own reason, so we'll be ready for that.
Okay. No. That's that's great I just a secondly, just on on M&A Youve done a couple of.
Acquisitions here in the last 12 months just in the business simulation training segment I'm just wondering if there's anything else out there that you maybe you feel underrepresented either civil or defense that could be an M&A opportunity.
Well the way that we look at M&A.
It really focusing on training outsourcings and partnerships and.
And whether they become organic opportunities like the easy easy jet outsourcing or M&A like this recent symcom transaction.
Really develop a with that partnership. So so we continue to focus on outsourcing and continue to have you know a good pipeline of conversations with airlines and partners.
And if there any other strategic opportunities that enable excited market access some some some technology capabilities or or flat programs. We keep an eye on for these and always kind of a of value buyer if theres something.
That is of interest.
Okay. Thank you.
Thank you.
Picking up on camera is less.
No question I would also add that even though it's hard to pick out at our defense results.
To date I would tell you that we're quite happy with the acquisition we've done a defenseless here in the top people World I think thats performing at very quite nicely and a lot of the revenue growth you save a good portion that's coming from that business. So we feel good about that.
Thank you.
Our next question coming from the line of Ronald Epstein with Bank of the American Merrill Lynch. Please proceed with your question.
Hey, good afternoon, guys its Kristine liwag.
At Christina Lake Christie.
For the seven to seven Max since the aircraft hasn't been recertified, yet how does the timing work for when you get to final software package from Boeing and when you can deliver your first full flight simulator.
Look I think it will be very it'll probably be coincidence I think we're working in lockstep with voya I'm quite confident that sort of the that aid the software lows that we need to be able to upgrade the similarities come from Boeing and and where I mentioned, where lock step with them and I don't expect any delay with.
Guards to having done they send so from that standpoint.
In fact, Christine we delivered nine mass so far in the first half of the year. So even what we're delivering currently will have to be updated.
Two aircraft system.
Thanks, a lot of that is software software was pretty fast.
You see and for the simulator advanced builds that you're doing right now how many of those already have.
Basically indication from your customers that they will order at first as a speculative build on your part.
Well I think I see nothing white, what Bob said, when we say white tails and means that is thought to attribute is it's not tied to a customer. So we are building up and they wind up either in our training centers.
So we can serve the market is.
Maybe as a separate customers buying some freaks out of mass or offerings, and our training network or will have a airlines buying a simulators and will deliver to them, but when we talk about white says we need to happen.
Attributed.
At this moment.
So not even a soft not even a soft indication of interest. So it's all purely speculative confirmed it isn't it isn't that unusual for us to do some advanced building, especially on high volume platforms like the Athree 20 or the for the Max.
But here, yes, we are making some call in terms of there being a pent up demand given the fact that the aircraft and out of commission for as long as it has been in the deliveries as well so that's what we see so.
Not a particularly bowl measure on our part we think it's just a smart preempting the demand we expect.
That's helpful and maybe switching gears to healthcare Mark can you walk us through what you need to achieve for health care to be profitable in the long term.
I think it's a question revenue revenue growth, it's not a said this before but it's not a question of the profitability of our products and services actually very profitable.
In fact, a more profitable area on a unit basis, and probably a there's certainly a lot other products that we haven't read for our business issue is volume.
We need to grow the business and that's why you see it investing in new products and investing in sales force mass the yesterday, which is meant so forth and that would say a stronger team and we started with a record rangana, who is a seasoned executive from the healthcare sector.
We now growing the teams the leadership team that's part of the Oh part of what we're doing a great to see reflecting cost.
It's been.
You know change in our strategy with the new team in place, which is really going after a hospital business.
You look at value based care in the United States.
That is driving as we said in our remarks that is driving hospitals to be able to have to invest more into training to make sure that they reduce the amount of love of medical errors that are happening as a result of if you like less than perfect training.
And that we demonstrate that space in aviation industry and.
As I've said many times before the healthcare industry as writ large is looking looking to aviation as the model as they look at this so that's really what we're at and you know when we look at the certainly short term rest of the year. We certainly expect that youll. They saw the orders have gotten to date I mean, we don't marker we don't report out.
For the size of the business book to Bill in the healthcare business, but I can tell you already in this quarter were seeing if were important backlog, we'd be showing a backlog. This increasing now it's not all delivering for a number reserves. The at the time to basically complete an order on the hospital sector that low.
Longer to it is in our traditional teaching hospitals for example, so that's reflected but having said all that you'll feel confident in the the growth outlook that we set of top and bottom line.
Double digit growth this year imply get stronger second Avenue, it's certainly a stronger vis a larger business going forward are or will or else, we wouldn't be in this business.
Sure and and I don't want to hold you to some sort of long term guidance, but any kind of just want to get a perspective from how you think about this business.
You know if do you think this business will be I'm 100 million dollar revenue business.
Quarterly basis.
The next two three years and then also I'm just understanding you know the size that this could be and then at what point do you have a threshold in which he decides to sell it and walk away from health care.
Unless we're committed to the business as you know I'm not going to comment that we're we're sticking to it but as we've done in any business that you saw in mining a few years ago with if we feel that there's been idea, it's not going to be the market.
Opt to easily say, Oregon, we think it's going to take too long.
That will reach reevaluate our your offices in that regard, but that's certainly not our thinking at this moment as debt. So any of the say right now.
I'm not going to be able to I'm not going to commit to in terms of any kind of audio shortly quarterly.
Oh.
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Revenue targets at this moment I can tell you that we will be satisfied until this business is substantially in order to is now in concert with our expectations the market.
Certainly not bloody minded about adults.
Yes. Thank you go up into the market and you know I think that's a you know we were very confident that the society will need here and we're the ones that you are best positioned to to be there to support the increasing patient safety.
Great. Thank you for the color Mark Thank you.
Thank you.
Our next question is a follow up question coming from the line upside do Chamonix with BMO capital markets. Please proceed with your question.
Yeah. Thanks for squeezing me in again somebody on the working capital if I look at this 300 million.
Working capital investment so far this year.
Half of it is declining or kind of a liability than payables and half it's kinda from the asset side, including inventory then it would put so what see a what's the driver behind this a liability and payables decline Im just trying to understand how much of that really comes back in the.
Coffee year.
So on the inventory spoke about that the it's a combination of whats working progress enough inventory.
The customer a and then you know as we build them but at the.
The simulators to deliver in the back half as well as the white tails that we've been that's it is pre assets were for demand that we see now and accounts payable side, it's really a question of timing on on a different.
Types of payments. So there are some annual payments I'm sad get paid in the first half a year that are higher than last year, and then some new name into the they're largely related to the interest and so on new imposed filings so that get paid out in the first half a year and there's always a bit of variation that's driven by.
By the shift in volume where in the second half usually has a higher volume a than the first half so it kind of contributes to two that's.
<unk> investment in the first half so all to say that it was a slightly higher investments that we do expect a substantial part of all of that study from samples the inventory and liabilities probably around kind of call. It three quarters of that the reversal and the second half the year.
Okay. That's helpful. Thanks.
[noise] operator will now conclude the session with investors and open the lines and members of the media should there be any questions.
Thank you as a reminder to register for a question. Please press the one followed by the for one moment. Please.
We do have a question coming from the line of Ross narrow when would the Canadian Press. Please proceed with your question.
Yes, Hi, I'm wondering if you could talk a little bit about what the impact both financial and otherwise that has been on c. from the Max a issues and the grounding.
Well I think its bailey.
In terms of the impact it hasn't been.
Really consequential to date in our numbers.
In terms of deliveries of our suppliers are continuing we delivered a number of of them this year or a language our expectation we fully expect to deliver.
Well actually the number total is 19 that we've delivered to date.
So we fully expect to continue to deliver this year because you know airlines will will need the in the as the mass comes back so I don't see APAC hasn't been.
Yes, I mentioned consequential to seize result, and we only expected them to be based on what is expected to be to return to serve as they are not public apply that what you read in public regard in terms of when that aircraft will start flying.
So so I think thats, what basically decided what to characterize.
And I guess, the flip side Tonight, or addition is what impact well are you expecting you built some whitetail. So what impact are you expecting once it's resumes.
Well I think it I should have said actually because we repeated in the a repeat what we said during the analyst question, how do they want it back obviously working capital because we've had these simulators that we that we built that are white tails, which means that they're sitting at work in process inventory.
And what will happen when the airplanes start to shortly to deliver a short.
We're entering service package or re flying with airlines, obviously some of those will deliver because we fully expect people to order some and we will be a position to add those simulators for training network and expect the that extra capacity useful to make sure the airplane and reach regains serve.
Chris flying status as quickly as he is the need to retrain.
Got it has come before.
And all of them will require software updates.
I would assume layers that are done certainly we'll have to be a you as is always the case will happen to be representative of the aircraft. So whatever the final configuration.
Of the aircraft, we will be supplies that are those changes vitamin a factor it will incorporate so he'll every simulator, we'll have to represent the final to figuration. So yet we'll have to update them all but as I said I wouldn't expect because we've been updating as we go along I wouldn't expect that to be a long process.
Okay. Thank you.
Welcome.
Thank you.
Our next question coming from the line items you can't after so no. We lapped price. Please proceed with your question.
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Operator, that's all the time, we had for the call today I want to think members of the media and of course are members of the investment community for joining us This afternoon.
A transcript of today's call will be made available later today on Cds website. Thank you very much.
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