Q1 2021 CAE Inc Earnings Call
I don't even if they prefer <unk> they'd be cross Super ladies and gentlemen for somebody a conference call begun Charlie.
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Yeah.
Good day.
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Good day, ladies and gentlemen, I welcome you do see first quarter conference call.
Please be advised on this call is being recorded.
There were no larger turn the meeting over to Mr., Andrew Arnovitz you May not proceed Mr. arnovitz.
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. So look for F. Why 21 and answers to questions contain forward looking statements. These forward looking statements represent our expectations as of today August 12, 2020, and accordingly are subject Jane.
Such statements are based on assumptions that may not materialize and are subject to risks and uncertainties actual results may differ materially and listeners are cautioned not to place undue reliance on these forward looking statements I.
A description of the risk factors and assumptions that may affect future results was contained and sees annual mdna available on our corporate website in our filings with the Canadian Securities administrators on SEDAR and the U.S. Securities Exchange Commission on Edgar.
On the call with me. This afternoon on my own sees President and Chief Executive Officer, and Sonya Branco, Our Chief Financial Officer.
After remarks from Mark and Sonia, we'll take questions from financial analysts and institutional investors.
Following the conclusion of that Q in a period, we'll open the call for questions from members of the media, Let me now turn the call over to Mark.
Thank you Andrew good afternoon, everyone on the joining us on the call I'll first discuss some I'll highlight for the quarter, then Sony I will review the D. that detailed financials.
I'll come back at the end to talk about our outlook.
[noise] much has been said over the last five months about the cobot 19 pandemic.
And the profile of ways, it's changed our daily lives.
Both personally and professionally and the word.
Unprecedented has since become synonymous with the crisis.
No doubt the rapid onset and pervasiveness of economic and social impact the pandemic or like nothing we've never seen before.
The impact on our employees and customers have certainly presented us with some very significant challenges.
It's in the toughest moments, however that were truly puts it at that and threw out throughout all of it.
I continue to be very proud of the responsiveness to see in its employees who've been adapting rapidly to this new reality by embracing new challenges mitigating risk innovating new ways to best serve our customers as their partner of choice.
As we came to expect in early March this year the full Brian.
Pandemic would indeed it is hard during our first quarter manifested by sharply lower demand that major disruptions to our global operations.
Right up to start we act quickly to ensure the health and safety of our employees and customers.
My takings extensive measures and we safeguarded, the companys financial position and liquidity.
She has shown considerable agility in resiliency amid the most challenging conditions our company has ever faced.
In the first quarter, we managed to significantly mitigate our innovative inevitable operating loss position to near breakeven on a normalized basis. We also improves our free cash flow performance compared to last year, a critically we maintain or resiliency, what a solid financial base.
Despite the challenging environment, we booked $417 million of orders in the quarter four point 76 book to sales ratio and we ended ended the quarter what is call it $8.6 billion backlog.
Looking specifically at civil.
Despite the major operational hurdles presented by mandatory temporary temporary facility closures, including our training centers and main manufacturing site.
And extensive travel restrictions, we managed to deliver to full flight simulators to airline customers in the quarter and we averaged 33% utilization of our training network.
With more than half of our global training network.
Either either close temporarily or reduced operations.
Utilization reached a low point around the 20% range during the quarter.
Since then we've seen average training center utilization right upwards of 40% as our facilities reopened and flight crews resumed some of their critical training activities.
We also continue to book orders, which civil assigning training solutions contract valued at $194 million.
Including a contract or nearby Athree 20, full flight simulator to China Express.
For your training agreement with Alitalia, a five year training agreement with White mold Air. Another 525, your training agreement with long term business aviation partner.
See aviation and a two year business aviation trade training agreement with Air Hamburg.
On the OEM front, we also could a five year training agreement with Boeing just important Boeings Abby initial pilot development program.
We've been adapting quickly to new reality is by introducing new virtual service offerings to support our customers as a response the border restrictions, including remote support for the installation acceptance in qualification of the simulators.
We also recently obtained ebay and other civil Aviation authority approvals for virtual training in certain of our flight training organization and we developed remote instructor operating station solutions for liven structure interactions during training session.
As a product of our ongoing digital innovation initiatives, we launched instructor led online courses radiation maintenance training and see air side, a new digital community platform that provides training his career resources the pilots, which I would encourage you to visit at Airside Das Arrow.
In defense in health care detect pandemic has also cost significant disruption, which have hampered customer demand and our ability to deliver our products and services.
Notwithstanding the challenging environment.
The defense orders for $201 million, including contracts to provide the United States Air Force will upgrade.
Enhancements to both the KC 135, and see went 38 aircrew training system program and to continue providing providing a range of in service support solutions for the Royal Canadian Air Force as CFO 18 aircraft.
Other notable contracts, including providing Airbus defense space.
Support for the development of new and upgraded training capabilities for Germany's Eurofighter program.
We also received an order to continue providing maintenance and support services for the Royal Navy Merlin helicopter training system.
And then healthcare, we put our full weight into designing developing bringing to market to see error one ventilator.
We didn't have any leverage from this new product line in the quarter, but we did incur some startup expenses and we've only.
We're only going to see delivers really ramp up.
On the 10000 units ordered by government of Canada.
In the second half of the fiscal year.
In response to the urgent needs of our customers. We provided complimentary training seminars on how to prepare healthcare workers in the fight against Cobot 19, what we also launched simulation based training solutions. Both web in hardware based to trained personnel in the safe practice of ventilation and its base.
Which is key to saving lives and release, the cobot 19, Ultra South training suite to provide hands on foundational training for physicians.
Additionally, as institutions began begin to reopen and offer remote and remote education, we provided new tools and training on how to implement distance learning what our solutions such as the distance learning for nursing course.
With that I'll now turn the call over Sonia will provide a detailed look at our financial performance and I'll return at the end of the call to comment on route.
Thank you Mark and good afternoon, everyone. It wasn't need an extremely challenging quarter, but with all the measures that we put in place in early April to safeguard our financial position and to ensure liquidity by reducing costs and preserving cash we help narrow the pandemics operational impacts and we maintained our resiliency with a solid financial base, our net debt position at the.
The quarter was $2.4 billion for net debt to capital ratio of 50.7% all things considered I am pleased this remains stable what our net debt position of 2.4 billion.
Dollars or 47.8% of total capital at the end of last year.
And on an adjusted net debt to EBITDA basis, we ended the quarter would a ratio of 2.4 times, which is up 40 basis points compared to the end of the last fiscal year.
Bolstering our financial resources during the quarter, we concluded at new two year $500 million senior unsecured revolving credit facility and expanded our receivables purchase program by $100 million QST.
These transactions provided us with access to additional liquidity and further strengthens our financial position all told to between cash and available credit. We continue to have upwards of $2 billion of liquidity, which we believe in addition to the cash we expect to generate from operations is enough to manage through the period ahead.
A market situation has evolved rapidly and reflecting the current impacts on our business and the time anticipated for recovery in our end markets. We recorded non operational costs of $108.2 million during the first quarter fiscal 2021 relating mainly to impairment charges on property plant and equipment.
Intangible assets in certain financial assets as a result of the continued negative impacts of close at 19 pandemic.
And since the ended the quarter, we announced that we are taking additional measures to best serve the market like optimizing our global asset based and footprint adapting our global workforce and adjusting our business to correspond with the expected lower level of demand for certain of our products and services.
These measures include introduction and acceleration of new digitally enhanced processes, such as remote installations and certifications and work from home practices. As a result, we expect to record restructuring expenses of approximately $100 million over next 12 months, consisting mainly of real estate cost asset relocation and other direct.
Costs related to the optimization of our footprint and employee termination benefits.
Actions will include the consolidation of some of our facilities where overlap currently exists.
The we gained the efficiencies of operating from larger centers and we will also be relocating several training assets to optimize utilization real estate and asset optimization costs are expected to account for approximately 70% of the total restructuring expense.
Taken together these measures are expected to enable see to emerge from the current period from a position of strength and we expect to fully realize cost reductions of approximately $50 million annually starting in our fiscal year 2022.
Now turning to our operational performance and other highlights in the quarter consolidated revenue was $550.5 million down 33% compared to $825.6 million in the first quarter last year.
Segment operating loss before specific items was $2.1 million compared to the segment operating income of $113.3 million last year.
Considering the extreme severity of the Pandemics impact on our ability to operate in the first quarter near breakeven operating performance. That's true Testament to the resiliency of seed business model.
What are the net loss before specific items was $30.3 million or negative 11 cents per share, which compares to 24 cents that we reported in the first quarter last year.
Also of note, we received approximately $56 million in gross governments wage subsidies from several of our global jurisdictions during the quarter of which approximately $44 million was credited to income.
So essentially all of this amount either flow directly to employees. According to the way the subsidy programs were designed in certain countries or the amounts were offset by the increased costs, we incurred in bringing back. Some 2500 employees who were previously placed on furlough or reduced work weeks I would underscore that we brought back these employees at the same time as implementing our cost savings mattress.
And in essence, the wage subsidies were applied as intended as a substitute for initial cost savings measures taken and to alleviate some of the impact on affected employees.
Now looking at cash flow cash from operating activities before changes in noncash working capital was positive $36.9 million for the quarter compared to $137.8 million in the first quarter last year free cash flow was negative nine $2.7 million in the quarter, which is an improvement over the negative 102.1 million dollar free cash flow.
Results last year.
The increase results, mainly from a lower investment in noncash working capital lower dividends paid and lower maintenance capital expenditure, partially offset by a decrease in cash provided by operating activity.
We continue to expect free cash flow to be negative for the first half the fiscal year, resulting from acute impacts of the pandemic on demand in operations and seasonally higher level of investment in noncash working capital accounts.
We also continue to expect to generate positive free cash flow in the second half of the fiscal year.
Return on capital employed before specific items was 8% this quarter compared to 10.7% last quarter and 11.9% last year.
Income tax recovery this quarter was $35.4 million, representing an effective tax rate of 24% compared to 17% for the first quarter last year.
The tax rate was higher due to the impact of impairment charges, partially offset by the change in the mix of income from various jurisdictions.
During the effect the impairments the income tax rate would have been 20% this quarter.
Now looking at our segment performance.
In fiscal first quarter revenue was down 48% year over year to $248 million as a result of a significantly lower than usual training utilization and the suspension of manufacturing and disruption of installations on deliveries of simulators products to our customers worldwide to the government mandated travel bans border restrictions locked down protocol.
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Civils operating loss before specific items was $16.2 million on the other a French civil book the sales ratio for the quarter was points 70 time and for trailing 12 month period. It was 1.02 time.
In defense first quarter revenue of 208 $80.2 million was down 13% over Q1 last year as a covert pandemic continued to contribute to delays in the execution of programs from backlog and in order intake.
While operating income from specific items was up 15% to $17.3 million for an operating margin of 6.2%.
Fence, but the sales ratio was higher this quarter at 0.72 time and it was 0.94 times for the last 12 months.
Lastly in health care, the first quarter revenue was $22.3 million down 19% from $27.5 million in Q1 of last year segment operating loss was $3.2 million compared to a loss of $2.8 million in Q1 last year.
About half the operating losses attributed to the startup cost for our new ventilator contract, which had not contributed to yet to come revenue in the quarter.
With that I will ask mark to discuss the we fall.
Thanks Sonia.
At the outset of the pandemic, we faced two essential questions as it relates to our business.
Along with the crisis left and now bad would it yet.
With the benefit us some perspective over the last five month.
Positive news is that we believe the worst the pandemic impact on C. made out may know indeed be behind us. However, the pace of recoveries unlikely to be linear or quick and it will most certainly be dictated by the progression of the pandemic.
And the rate at which travel restrictions and warranties in safety be lifted and economic activity improves.
Global Air Transportation, and air passenger travel well, especially hard hit when I add up currently forecasting commercial passenger traffic to be down 50% to 60% this year and a recovery that could take three years before getting back to pre colvin levels.
We continue to view the current fiscal year the tale of two have.
With the first half of the new year marked by lower demand and disruptions or the second half to potentially begin to inflect more positively.
The timing of market recovery remains unclear.
Well, we're confident in long term fundamentals of the market, we serve and we know this to help us.
Looking ahead, we're planning Ses future from a position of resilience and strength.
We have global leading market positions recurring revenue streams attractive end markets and the civil defense in health care as well as a solid financial position.
His civil.
As the global fleet eventually resume service, we expect to continue building on our previously positive momentum increasing market share and securing new customer partnerships with our innovative training and operational solutions.
We're currently in advance discussions with a number of airline customers to potentially do more for them.
I believe the current context.
I will lead to more airline training outsourcing opportunities as the industry looks for ways to gain greater agility and resiliency in the post call that 19 error.
In business aviation, which represents a substantial part of our civil business.
The man is driven largely from addressing a regulated training needs of the already active global business aircraft fleet and the delivery of large cabin businesses.
From this perspective, we continue to believe this segment of the market will fare better than commercial then the downturn.
And we'll also likely recover faster demand for civil full flight simulators as closely linked.
Two new aircraft deliveries and while the total market for similar is expected to be some stats substantially smaller this fiscal year.
We expect to maintain or leading share of the available full flight simulator sales.
We have the benefit of a large backlog of customer funded full flight simulator orders, though and several full flight.
Similar deliveries from backlog should.
Should indeed be delayed but the risk of cancellation remains low and we expect to substantially deliver this backlog over the next couple of years.
In defense.
We also benefits from a large backlog of contracts with government customers to provide training solutions and mission support services that are considered essential to national security.
This week, we announced that Dan Gelston will become CHS, New group, President Defense and security transitioning from how you would see CVP business development and growth initiatives, who currently serves us interim group President.
Dan brings a wealth of experience is a proven leader with more than 20 years of experience the newest military intelligence community and the global defense industry and it will be joining us on August 24, and based out of Washington DC office.
In the current fiscal year.
Hello, Good night keen related issues are slowing defenses progress towards program milestones on work in backlog, including for some of our more complex programs.
The pandemic has also led to delays in contracts awards globally and the structural effects of low oil prices has further impacted the rate of expected contract awards in the middle East.
More recently, the acceleration of new Colby cases in it in the United States has impacted our ability to deliver training service system from certain of our sites.
Although defense continues to be hampered by Copel 19 in fiscal year 21.
The long term outlook for defense continues to be for growth supported by a large addressable market for our innovative solutions and the realization of the benefits of our new leadership.
Despite the near term headwinds, we're maintaining our leading position as a training and mission support partner, thanks to our leading edge capabilities in translating to fiscal world into the synthetic world.
We're expanding beyond training to become a leader in digital emerge.
And with our expertise in integration of live virtual and constructive training, we believe that will make attractive inroads into that market in years ahead.
And then health care, our purpose mission and passion is to make health care safer. We believe this significant changes brought about by this pandemic will result in a bigger role for E learning and healthcare simulation and training.
Looking for the secular shifts ahead appear promising we continue to believe c. healthcare as well position to capitalize on this change in the appreciation of the benefits of health care simulation and training to prove safety and to help save lives not only three health care prices, but also during more normal times.
And we did innovative products and demonstrated to 2 billion agility C. healthcare will be kit is our expectation to see of health care will become a more material part of the company over the longer term.
We have a deeply rooted culture of innovation at a proven ability to adapt quickly dynamic market conditions. This GE air one ventilator, we just developing healthcare is a testament testament to seize agility and innovation.
We rapidly applied the full gamut of our technical capabilities in response to the crisis and our fielding you opportunities globally and design manufacture and sale of life saving ventilator.
Tough times required you thinking and across all of our market. We've adapted our offerings by introducing new ways to leverage virtual reality at distance learning technologies to serve our customers critical lead.
She is a high technology company, providing solutions at the leading edge of digital emerge.
Our extended outlook remains highly compelling with potential for compound growth and superior returns over the long term.
See employees are most valuable assets are viewed with a culture of innovation empowerment excellence and integrity and we expect to emerge from a pandemic even better positions.
Our restructuring program is expected to yield approximately $50 million of annual recurring cost savings starting in fiscal year 2022.
From initiatives, including the introduction and acceleration of new digitally enhanced processes and the optimization of our global asset base and footprint.
At the same time, we're keeping up the pace of our investments and focus on technological innovation to reimagine, the customers experience and broaden our aperture to revolutionize training and operational support solutions.
As our core end markets recover.
The new normal that emerges could present novel challenges for our customers.
We believe certain trends will arise in greater force post call with 19, such as E learning remote work and even greater imperative on safety and the accelerated digital transformation and virtualization of the physical world.
She is core capabilities aligns very well with these future needs and we fully intend to use the current period to further strengthen our technological expertise and expand the aperture of how and what we bring to market.
We're leaning forward to capture more organic growth by leveraging our leading edge understanding of man to complex machine interfaces and we continue just start our leadership in attractive markets with long term secular tailwinds.
Already.
We're seeing excellent customer receptivity to our recent toward the recent new technology development in the area of machine learning enable data analytics remote delivery and virtual reality augmented reality and will be driving forward to excel on these new for us now more than ever.
To conclude we're effectively managing the things we control within this unprecedented environment and were decidedly focused on the future and I expect we'll be ultimately stronger fourth with that I. Thank you for attention and we're now ready to answer your question.
Thank you Mark operator, we'll now want to open the line to financial analysts and institutional investors for questions.
Certainly thank you and one's going to as reminder to register for question and it's a one by before on your telephone.
Three teleprompter Ignatia requests for question has been answer to draw your own attrition over one for better threes.
One moment. Please her first question.
Oh, that's our first question on line from Friday, Shahmoon with BMO capital markets go right ahead.
Okay. Thank you good afternoon.
Hi, Thanks.
Question on the cash flow, maybe some yet so it's how you look at your.
Cash flow from operation before working capital.
Kind of mortgage uncovered your capex and development costs.
Order.
Can we infer from God, Doug Civil Aviation segment was also positive before working capital this quarter.
I think fatty so I think.
I'm glad that you highlight this so despite the fact that more than half for training facilities are closed or reduced capacity and active in manufacturing was closed for more than half a quarter overall free cash flow has improved and as you point out cash from ops, although although much less or cash from ops before working capital although much lower.
Lower than last year.
Was still positive so the business overall, despite the challenges with cash positive before working capital and this applies to each of the segments, including our civil overall and our training network. So despite living through Oh, one of the most challenging quarters or in our.
History, I think it's a it's a great demonstration of the resiliency and the cash generative model of see that our cash from ops was positive in this quarter now of course, we invested a noncash working cap some of that is a bit of slowdown in some payments that were managing through or with some of our airline customers.
But a lot of it was still a the impact so if the usual seasonality that we see so if you take a look at at the working capital accounts.
A lot of the investment was on accounts payable side and that's really a reflection that we see every year of the higher production levels and activities in Q4, which then flow through in the first quarter, but at lesser revenue and obviously complete very much exacerbated in this in this quarter with the fall on the revenue side. So yes to your point.
Overall see cash from opera operations before working cap positive and that's an all segments, including our training business.
Okay, no it's impressive that you're going because components.
Before working capital I guess in a quarter, where utilization on the low 30%, but.
Do you do expect working capital.
Do you tend to be kind of a neutral reports back in the nine months coming like how do you.
Thank you both for the balance once a year.
Yeah and to your point about it so I think it's impressive theres resiliency, but also reflects a lot of the the measures we've put in place on cost containment and a leveraged to preserve cash and so that all all contributed to a two the the positive cash position in terms of working capital. So the first half.
Usually is seasonality will drive some investment and and then some reversal in the second half a it you know and especially I think that will be reinforced with kind of the.
Second half inflection positive on free cash flow. So so expect oh on the free cash flow side continue to be negative in the first half positive in the second half and some of that will also I expect come from working capital as well.
Okay.
Just warranty.
Hi, Suffocation Mccaskill guidance three guys from guidance.
Now to include the impact like discussion parts come the restructuring.
Flour and go through a mouse or not it does not include does that we haven't corp. Yes. It does so we've incorporated the cash impact of the restructuring.
As I mentioned in my remarks, it will we'll execute this all throughout the next year and show the cash profiling will follow some of that execution and so and.
And so it will but it has it is incorporated into free cash flow.
Okay and based on all of this since you're just told man.
An expectation that human things should get.
Better in the next six to nine months as a business aviation market kind of on recoveries I Museum market won't recover I'm thinking each one plus each to cash flow, you're saying Paul good everything then I mean, maybe negative and positive we should.
Arrive at sub outcome that is generally neutral to positive for the bank.
One of the year old at all.
Oh Riyadh, both both has we will come to an outcome. We haven't provided guidance for the full year a lot of variable spill up but the fact that we haven't guided strongly either way a negative or positive kind of emplal and first.
And for is what's what's your thinking yes.
Okay. One one other question quickly I mean, you talked a lot about.
The just dilution of the model lender what would be for how do you said probably come out of prices like this.
Is there way for us to think about how much of the training I.
That is conducted is not necessarily need to be conducted the center a declining center. It sounds like you don't need of simulator to do it it's a classroom kind of training how much of that kind of training happen to be in Glasgow him that could potentially move into an online.
[noise] model enough to permanent way going forward than maybe optimize this whole training.
[noise] loosens further as we go in the next few years.
I'll take that fatty I think but we don't have a number for it but.
If you think an initial course for example.
On a to fly and aircraft typically you might spend it but look fair business aircraft. If you take May say 334 weeks at the training center and you're you're doing probably the equivalent of two and a half weeks of that sitting in the classroom that just ballpark located.
It depends by aircraft.
The rest you're you're doing seven eight the rise in the simulator.
So I mean that could give you some idea, but when we when we talk about the restructuring savings that we have and achieving permanent cost reductions going forward. The 50 million we talked about.
Some of that is basically take advantage of somewhat you just talked about.
We have learn.
To do a few things virtually during a pandemic and at the same time, we've been we've been investing quite substantially digital over last couple of years, and we announced our project did digital intelligence or member of wanting to have billion dollar investment R&D.
A couple of years ago that we didnt lots from Montreal.
That by the way is why is that investment is why we could turn ourselves around a goal virtual literally overnight because of the ability to do that but but now go poeschl when everything is going virtual okay.
I should say that but the world is obviously going virtual but definitely it digitization five multiplied maybe just exaggerating for effect, we did increased tenfold. So the investments that we make here the processes leveraging digital is gonna have substantial impact.
On how we deploy trading in the classroom, specifically, how we deliver simulators as well. So all these things that we're going after getting permanent savings, that's that's where you're going to see it.
Thank you.
Thank you very much.
Our next question on the line.
From the line of Dark Taylor with Canaccord Genuity correct.
Yeah. Thanks, good afternoon.
One more question on the cash flow guidance.
Just like to understand whether your guidance is contingent on utilization rates for the civil aviation business moving materially.
Higher than the 40% that they've been there, but you mentioned there at presently or if you can achieve that same positive free cash flow with 40%.
Throughout the balance for the year for example.
I think its bit too early to take care of predictions on the level Utilizations, but we do expect the ramp up to be slow where a than we saw and so we factor that into two our our free cash flow prediction that said, we do expect some sort of look inflection in the second half.
To drive a better performance in the second half and that will be the driver of free cash flow improvement.
Okay.
The utilization I mean during the summer months, usually is a bit slower given the demand because I'm. Just wondering if that is at all a factor this year or if that whole seasonality thing can be completely thrown in the trash for this year. When we look at utilization in July August versus.
The fall and winter.
I'm sorry, I missed the first part of your question, Doug I think I got it yeah.
So that there is normally some seasonality to add to training demand the way to think about it is when pilots in various regions are very busy flying.
Less busy on the ground in the training centers training. So in Europe. For example, the summer months are usually a quieter in terms of training demand and they'll plan out there.
You know their annual recurrence the recurring training according to the demands of the flying schedules.
But to your to your second point everything is out of whack.
In this environment I mean, having had the kind of operational disruptions that we saw.
Through the first quarter and the demand shock, we got down to utilization levels on average in the network in the 20% range. So that's that's unheard of.
Yes, but I suspect I go ahead.
Just had a bit more color on kind of some of the assumptions kinda underpinning the second half.
We do expect some recovery, but also a higher level of deliveries as you saw only till two deliveries a this this quarter and so we do expect the deliveries to be a very second half weighted as well, but that that'll drive on the cash flow performance as well.
Okay and.
One more question on the on the civil side, the I mean, I Wonder if you could provide an update on switch some of the regulatory bodies are doing with respect to relaxing the training requirements, which I mean, certainly was a factor early in this covert pandemic I mean, how would you say that's back to normal across your geographies or is that.
How do you expect that to continue to evolve overtime.
No what I haven't heard much about it at all in the best to.
Literally a three month, so I think that was a one off that.
Literally to cater for the fact that people that are couldn't get to the training centers because of border restrictions things like that so I think that one off situations behind us.
That's helpful.
I'll leave it there. Thank you for taking my questions.
Thank you.
Thank you very much well determine next question on the line from the line or Kevin Chiang with said BC card ahead.
Hi, Thanks for taking my question that dig into the to the utilization rate.
Where we sit here today, the 40% is a way to think about what that looks like across your your key regions.
Asia and North America in Europe, and then sort of split that between business a commercial training as a way to think of the difference in utilization between the two or or is it all pretty static around 40%.
I think you find.
This has got a little bit more than.
Then civil a then a commercial.
The as a as an overall number the I think I wasn't a big get.
Big differences across the World. So let me just go to look at my notes here, but.
In the end I do I do you have more detail.
So with regards to do so what we're seeing it that fact is trending better than then commercial comparing quarter over quarter, a and in terms of in terms of regions I think what we're seeing the hardest hit is really in the artist said is Europe, a and that's what we're seeing a Asia.
I'm still.
Impacted but.
Doing pretty resilient, but really a Europe is where there's the hardest impact yeah no and.
North America I really good training in Norfolk continues to lead the way from that point of view.
We've seen less impact there.
Orders really as you saw the wrap up utilization it was really.
Really affected a lot as the opening of borders.
And so for example, Dubai open up recently, so you know a bit CBS business aviation activity, we'll have we'll pick up quite substantially.
There because.
For example of customers the far east.
Can't get to North America, because theyre restrictions and they can we can serve their training demands on business aircraft Dubai as just one example.
Okay. That's helpful. That's very helpful color.
Secondly for me just just hold the restructuring.
I just wonder what impact if any that has on on the simulators deployed in your home network is does this restructuring, resulting in a shrinking of that network as maybe you get rid of single simulators and multi type two aircrafts that.
I've seen a significant decline than demand as airlines are just that old fleet. Just just wondering how about number trends as you go through this restructuring.
Yes, so so well I think what are the main impacts of the consolidation of facilities.
You know, where we have overlap not by no means are we exiting any market, but really consolidating to create larger center drive more efficiencies. Another part of that restructuring includes relocation of assets.
So between training centers, and then matching them up across our geographies to better align to where demand is an optimizing utilization part of that there will be some some assets with excess capacity that will be sidelined and and ultimately sidelined the until volume comes back so.
We expect about a in a about 20 or 20 units of assets that will be relocated across the network in total and or around 20, Oh, ultimately and less than that that would be much less than that that would be reduce.
Okay. That's helpful. Maybe just last one for me just maybe following on some of the [noise].
The previous questions around the increase in virtual training.
And I appreciate it.
So I guess one of the cost savings there, but what do you see what impact and maybe like the relative capital intensity.
Civil moving forward.
In the sense that it might reduce the footprint you might need when you think of what the tools training center has to be in terms of size to flow in number of pilots like is there a capital savings associated with the increase in virtual training or.
Or does that sound that does not impact oh that that line item.
Well I think it would impact that for sure.
I think that the.
There's been if this both offices benefit from customers as well right. If they have to spend less time to training centers are very big.
Cost savings for them.
'cause they don't want to travel as much me out of a line of as long. So there's benefits on both sides, but yes. The cat there. So there will be some capital.
Savings as well I wouldn't call. It a first order effect, but it definitely will affect things.
Okay. Okay. That's it for me. Thank you for taking my questions and best of luck for the remainder of leader.
Thank you.
Hi, Chris you're talking next question on the line from Cameron Doerksen with National Bank financial Great ahead.
Thanks, Good afternoon.
As shown on the I guess the defense segment, so you've got a new leadership coming in there.
Mark I'm wondering if you could maybe talk a bit about what.
His priorities are going to be a or I guess, maybe what is marching orders are for the defense segment. If there's anything different that you want to do there or any a key priorities.
Well I think look well first of all very happy to have Dan onboard as I mentioned has very strong credentials and track record.
In the defense industry and the jobs to these done.
As well as in the U.S. military and Teleges Committee so.
I think look it's picking out the but all from Heidi Wood has done a great job over the last few months at stabilizing or defense business and stack and laying laying a path for growth, but for me. It's all about executing growth look I know you've heard me when you talk a lot about but that.
I think look this I think this year 2021, it's a transition year for defense lots going on we as we will go back and everything we said, but I guess just one I just give you one data point right now because of the impact of resurgent gold with United States, but our activity at our at our training centre in the in Florida I see.
30 days, what we train primarily foreign customers.
His force is more is harder hit now than it was back in the in March and April. So I'll give you one idea so but to me at the parties growth or there is growth market, we see it.
Very very sizable market, we've talked about that many times could and really season finale, and his makeup is a growth oriented individual as solid tracker used to working by the way or in the in the kind of cost structure that we are is a you know at in the having special security agreements and selling into.
Into for example, U.S. market.
So I think we're going to.
I think that's for me is.
It's all about growth growth beyond this year, because this year's about stabilizing what were up and in 'cause, it's a tough year, but.
Stabilizing and growing.
Okay, that's great and maybe second question for me you just on the you're you're shifting over to civil.
You mentioned that you're in some perhaps advance discussions with some airlines about potential I would say outsourcing opportunities.
You know something you think you can execute on this fiscal year in and you know, what's your willingness to deploy capital.
Into any of those opportunities.
Yeah, I think we definitely can go up.
Secure some of those opportunities. This year look good I don't hold that Pat the customer pence pet customer spent 10 on signing the contract, but clearly I think there's oh, we have a very compelling solution to bring to bear, especially in these times. So I do think we'll see we'll see the opportunities and where to invest cousins with a number.
Customers as I talked about and yet we'll deploy capital because of as we've done that weve demonstrated.
Well it past few years, when we deployed capital in our training network is very accretive and relatively fast so.
We're quite happy about that because of course, it's our core business, we know well so yeah, absolutely will seize upon those opportunities I think we could secure so.
Great. That's all for me thanks very much.
Thank you.
Thank you. Okay. Next question on the line is from Cornell cooked over Scotia Bank right ahead with a question.
Thanks, and good afternoon, and I'm, sorry to beat the dead horse here just on the utilization if I go back to your comments back in May I think you are suggesting that 20% in April at the low point and then 25% to 30% in May So if I do the math, perhaps you might have been in the mid 40.
Percentrange in June to get to the 33% for the full quarter supposed to is that math correct and have you seen that mid 40 percents sustain into plus 40 days this current quarter.
Well, we I think we averaged about 33% who said in the quarter and we're in the Fortys send a look it's pretty much in line with with the growth of the the fleet I mean, the correlation between the globe, but you think the fleet of aircraft flying around in a world today and look at the increase I think you'll find.
A very high degree of correlation between that fleet activity and the a and the level utilization our training centers, which you might expect because of course to regulated market. So.
So that's about what I was Santa Clara.
Okay. Thanks, a lot for that.
And then just trying to reconcile some numbers, yes, if I look at the training center utilization as well as cemented the deliveries in Q1, they were both down more than 50% versus last year, but the revenue was down only 4% to 48%. So just trying to understand the mix. It seems like it's coming from business aviation as you said the inflation was better and wish we'd probably do not see.
In the utilization numbers is there anything to the mix and revenue that should have driven revenue better than you might use and then that deliveries.
I'm not really I think there's so many different elements of the civil portfolio, I think 48% down on revenue.
And Ah and Ah about half on more than half on on the Utilizations are pretty much aligned and we kind of see a similar level of reductions across the board on the portfolio items.
Okay, and the scripts I mean, and Oh, the backlog side. So obviously the auto activity was reasonably okay, I guess compared to where the revenue loss.
But there was some adjustments in the backlog that's kind of flat to up I think I'd be some decline in the backlog can you kind of help us understand the nature of those backlog adjustments income so be it amount or nature off maybe cancellation sort of adjustments. Thanks.
No no cancellations on any friends. So no cancellations included in that adjustment number. It is it is larger than usual and one I'm a items, what there was a meaningful negative FX or element of more than $100 million or the Canadian dollar appreciated quite a bit since the March and we always revalue the bad.
Backlog to a the current FX. So so quite a large impact on FX and the remaining really reflects the impact of the training requirements in demand that we see from customers who've gone through a they're planning and their process of realigning operations and their fleet, a and and working with us.
That captures some of that revised training demand in the near future.
Great and last one for me on the working capital side. So the inventories seems to have gone up.
Quench Lee.
Building on the white fields in anticipation of any last minute orders are that inventory balances in time before the contractual revenue in the second though.
Yes, so no there are no investments and what it tells were actually being quite a rigorous and frugal on on inventory management, that's part of our cash preservation noncash working cap a management measures. What you see there it's really a reflection of the fact that we only delivered a two simulators in the quarter and so you're you're building up your where.
Taking a process in anticipation of of deliveries for the rest of the year.
But that's it for me thank you.
Yes.
Thank you very much. We'll go next question on the line from direct government GFL or whatever the question.
Hey, Mark Thanks for taking the question and that's on the topic of virtual training do you think longer term that you've got that say approvals and approvals around not having to come into your centers do you think that lowers the bar.
Competition and brings the moat down thinking longer term and ability on you to increase pricing power.
And this vein.
No I don't see it I I really don't.
I think that I think it makes a stronger Steve very Frank with you I mean did people still have to come to the training center to do.
It is full flight simulator training and to the extent that with the Oh with the tools that we could provide a to be able to do it virtually.
It makes it and using all of our.
Simulation suite that we can make it birch seamless for them.
I think it makes us even stronger better as a.
So I would be I would have the reverse a conclusion.
Sure. Thanks.
Thank you very much.
Well go next question on the line from the line to bring more profitably, but there is our bank capital markets go right ahead.
Yeah, good afternoon, everyone.
Looking at simulator delivery I understand that yeah. The two one was pretty normal with only two but when we looked at the last two years you deliver Nathan Sig deliveries. So how should we be thinking and Cisco 21 and fiscal 22.
Given the a the current market conditions.
Well I won't go into fiscal 22, I think I would tell you that.
Our assumption as well deliver about 35 to 40 this year very much geared towards the back half because oh.
<unk>.
For obvious reasons, we're delivering all of the world and some places were that we're delivering to our no still have restrictions on.
How we can get there. So so I'd say 35 to 40 for this year.
Back really much in the back half and I I I'm not getting into the next year, we'll update that as we go forward.
Okay, and Mark Hi bid was the only thing maybe I'd add to that.
We did see in our in our earlier remarks that we have a large backlog there that's funded by customers that we expect to substantially liver over the next couple of years.
It is just that is large backlog and while we can't at this point precise what those delivery numbers would look like into the next fiscal year. I think you could infer that there is a large backlog there and as things ease up we will substantially deliver it so if you're sensing of whether there's a.
Terrific, a cliff impending I would I wouldnt wouldn't think that.
No. That's what are that we have is the large backlog that provides the you know a level of support for our business for quite awhile.
Okay, and if we stay in civil what are you seeing in terms as demand for training services second knocking the contents of the training bubble that you talked about in Q1.
Well I think look what we may certain assumptions I would tell you this very very fluid.
We airlines are in large cases are predicting their training demand month by month literally so within close where customers. We have made certain assumptions when we talk about predictions for cash for this year I don't think we've made outlandish assumptions with regards with that bubble will be so I think we size ourselves to be able to seize the opportunity.
But the situation is very fluid as I said, so it's hard to predict.
How and when that will happen.
Okay, and if we go on besides the acted bid the proposal increased substantially from 3.6 billion in Q4 to about 5 billion. So could you talk about the reasons behind the increase I'm also from a margin standpoint, what we will sheets.
Fiscal 21, given the mix between those services and the equipment.
Well I think that Oh, well tell you I think the size of backlog Oh, sorry, the massive visit proposals going up we've been we haven't stopped on that front, we're still writing proposals and that's the key to this business now what you. What you see is a couple of things right that is first of all we're bidding on larger contracts we have the big.
Really to be able to do that at the same time you know the awards have them at a fast so that that you know as did the ones that we would have liked that already have the order hand is still in the bid and proposal. So so that's that's more than the negative part look in terms of margin I think we'll just stay on May look.
A little Sanya coming out that but no beat guidance on that one you want to.
Yeah. So as Mark mentioned I think we will continue to see a short term debt well dystrophin throughout the year on on a execution of contracts and advancements as as these Ah you know travel restrictions and Lockdowns continue or so so we're kind of refer a seeing this.
As they transition here, a you know growth beyond but a bit of a transition year end and.
The margin will be impacted by the level the level of advancement on these programs because as you know there mostly product programs. So there are highly contributed to the S. A wide margin disproportionately show and also on order intakes freight. So so we've seen delays Q4 Q1 on on order intake, especially on the product side.
Oh, and and so that that's contributing as well so as that continues to to impact. That's I think I think we'll continue to see a bit of EUR of impacts.
On defense throughout the year.
Okay, and what would be the mix between the equipment and services in Q1 specific we for defense and are you expecting a big shifts towards your Q2 in the second enough Sonia.
Not necessarily a in the second Oh and the second half we do see some shift a tent in order to support kind of like a stronger second half and this quarter. It wasn't the thirtys, which was which is a much lower than usual.
Okay. That's great. Okay and last question for me, which we're supposed to government subsidies what should we expect in terms of subsidies in Q2, and maybe the sick enough.
I think hard to say because some of these programs the criteria. It keeps a or gets gets updated a you know where we're operating in three different countries and and a these these measures. These these measures are are really a shift.
Thing in every country are the most important one is here in Canada of course for the most part a certain locations like Europe et cetera.
These these subsidies are straight flow throughs to two employees that have been furloughed are impacted and so on on the Canadian side. It really will depend on the Onsie twosies eligibility criteria. So we were eligible in this critical in this quarter a and so we continue to monitor on whether we will continue to be eligible.
So a in a in the coming months.
Okay perfect. Thank you very much a forward the thought.
Welcome.
Thank you very much and once again as a reminder to ask any questions or comments I just your one for on your telephone keypad.
Well go next question to learn from Tim James with TD Securities Corredor had.
Hi, Thanks, good afternoon.
Maybe a question your from Mark the press release States would see as appointing digitally immersive technologies to further differentiate.
Solutions and address a wider range of customer needs I'm. Just wondering if you could please expand on sort of what that wider range of needs could could include.
Well I guess I won't get into too much right now as Tim but you might think about look at the end agenda to date.
She is a technological power.
And we demonstrate I've talked about that in my notes that we've demonstrated space. How we can bring that it took to bear in an extremely short amount of time into development certification of the simulator you know this was not.
Martin Ventilator, and I keep coming back to that because it's a quintessential example of what can be done. This is not a simple device.
The life seen device certified the highest levels of health, Canada, not a watered down pandemic required a real requirement for use on was critically.
Ill patients in that I see you setting years using pure accident. So the fact that we're able to do that.
Again, not a build to print the new design and completely build it and now producing 10000 units for the Governor Canada.
His testimony to the technological capabilities of this company and the culture, which we do it. So you think about how that can be translates to fuel by the way we demonstrated that in the ventilator, but if you think about what weve well, who we are we've always been technology based company.
We are where our focus has been on the world of training in our core markets and that we will continue to excel at that but if you to think about ventilator. A ventilator is thought to train device now it is when a week combining to what a full training suite in fact, we could basically.
Lee you are the expertise that we have to be able to subject matter expertise that we need to be able to develop came from the fact that were trading experts. So.
There's a lot more we can do with that technological capability.
In Canada for example, just as a for instance, if you're not the Canada walked into this it to this crisis with no indigenous capability to be able to do ventilators in Canada. That's why the crime is sure announced three Canadian companies to be able to do so to do so now I don't think candidate ever once again flat footed again.
In that kind of situation. So there's a talk about self sufficiency, just the fact that Canada, Canada by is a makes us on a ammunition for a for full for weapons not because it can source it anywhere else in it was because if after it was a certain mercy wartime tight like situation. They don't want to have to.
Rely on somebody else for bullets, well now that that kind of thinking is being turned to medical equipment. Obviously, we hear a lot about personal protective equipment that kind of thing so.
If we have this competitive nicely and we do believe is competitive by the way read out on the box Renova on you might think that and we're seriously looking at that can we continue providing that type of equipment not only Canada. That's just one example, but I can think of a whole sources of example, I brought in.
Hi, Heidi wood.
As hard as our head of a at my level executive VP of business development, and new growth opportunities and I think what's important here as I broader in before this pandemic ever was you know that as seen the light a day because we've we but we have been thinking for a while that theres a lot.
No errors that we can leverage our technological capably, but no push push pull plus coal within the civil aviation market that you know what all the you know we're not going to it'll be a pollyanna and think thats kind of come back in time soon but we think there's a lot of things that we can do to that or be able.
Well to roll role within the will obviously would do things like capture more outsourcing opportunities grow the French gross civil but take that take the technological capabilities that we have including very large capabilities in digital and leveraged that into other areas not necessarily new more.
Markets markets, where in but deepening our share of wallet, where customers and that's right in line, but we do because we always.
Great embedded in our vision of the company is partner of choice and that's what we do we get into.
What our customers we don't we like Yeah, we'll try to sell you assimilate or try to sell you training will supply you pilots, but more importantly, we get in we did two into a relationship and we stay connected because of our focus on delighting, a customer and providing you don't technological based solutions.
That enabled them to answer some real critical needs that they have.
So that's what we're talking about to watch well I think you'll have to watch also with a few quarters and watch a stuff will do but certainly we're going to put some best out we're going to put the Vince that's down I think we should do that and I think that were very good at agile and if you've heard a tail. The term I like is that in that.
Well use in Silicon Valley and places like that is there's about fail fast try thinks use agile methodologies and fill fast testimony your customers get some customer feedback as you see if that works he could get traction that's the kind of things we do long answer not a lot of specifics, but that's what I give right now to happen. Okay. Thanks much.
Hi.
My next question when you could talk about that portion of civil equipment revenue.
That isn't just a big ticket full flight simulators.
Ultimately, how how significant is that portion of civil equipment revenue.
Relative to full flight simulator sales and is it more or less stable.
Under current conditions or conditions of weakness.
Because it's easier to meet milestones deliver the product, it's not impeded by travel restrictions et cetera.
I think what we would call the aftermarket Pds got services I don't think we've ever supply the breakdown yet.
We don't actually break that out, but I would say that it's you know it's a fairly significant part of the business we do.
In civil it's mainly driven by regulation.
So that is to say you know whenever you know a aircraft as updated usually every couple of years aircraft systems. The simulators needs to be updated then there are regular maintenance.
As well I mean, a simulator will run day in and they owed for 25 years or more so you can imagine that.
There are things that have to be updated just by virtue of where and others that.
The updated by virtue of regulation. So typically on a simulator that will sell will generate about a million and a half to $2 million of DDS revenue or updates and upgrades over its life span on it in the installed base.
And is it fair to say that that.
Aftermarket revenue sources is more stable during times like this than just the.
Great sale and delivery of.
So flight simulators I assume.
Well go ahead.
I think I think it's affected as well.
Everything at the airlines that has been affected by this crisis and that has been affected as well and travel restrict your that do travel restrictions you don't within lot of cases to be able for us to deploy those solutions, we have to travel and we deal with the restrictions that we have we that we have been able to travel as well. So I wouldn't make is some says that that is.
Maybe a little bit more stable, but I wouldn't say materially.
Okay. Thank you my last question just want to turn in the 737 Maxcv over the next couple of years, it's going to be.
Sort of.
Moving a little differently I think relative to lot of the commercial aircraft platforms given the challenges that it's had in the past it makes sense for the timing of.
Kind of deliveries at this point in training demand outlook for that platform.
And when you expect that that could begin to positively impact financial results as it is simple as kind of thinking about win.
Yes.
The grounding is lifted and and deliveries of the aircraft resume that coincident, we sort of your revenue will will ramp up.
Well, well, well certainly and even before because.
They obviously you have to train their crews ahead of time so.
I think we worked very very closely with Boeing specifically and assisting them to with the certification efforts in a supportive activity for as it relates to training and the of course, you would expect us to be doing that because we have the though the lions share of all the simulators. The did that have been sold on a sub 37, Max So we're very.
Most of that story, we think that Boeing spirit, making great headway with the certification authorities.
I think we saw recently D.F., hey issue there.
Notice of proposed rulemaking, what would a.
Comment date, that's very soon so that to me as a single that you know things are closed than they have to get a certified for that certification of the aircraft than sort of pipe for for operations I think that should follow pretty quick I would think you'll have that Boeing for that but I think sufficed to say that as soon as that is restrict is.
Is lifted and airlines will I'm sure, we'll be taking the airplanes that that's an airline to airline the situation, but we will you saw its Michael Ariad light Ryanair, saying is definitely going to take all his aircraft. That's what he said and they're a good customer so.
I'm sure that their maintained or training on the sub 37, Max's. So I think we'll be in lock step with delivery of the a day and returned to service of the various fleets of aircraft.
Great. Thank you very much.
Operator, I see we've gone over of the a lot of time, but here. So I think we'll conclude the Q and a session for analysts and investors now and we'll open up the lines to members of the media.
[noise] sermon once again as a reminder for their media on the phone similar to ask a question for free we're pressing the one who buy before on your telephone keypad and your through tone project nurse request.
Well, it's going to me, there's no one for for any questions or comments.
One moment please for our first question.
[noise] I forgot to our first question on the life in the media from Alison Library with orders correct.
Thanks are you seeing any increase in pilot training on wide body models like that Boeing 757, due to the industry's demand for cargo fights.
Well, we definitely see cargo going up for sure at the cargo career that.
Our having a.
Hi level of activity it.
Because of Oh, amongst other things online shopping, which hurt is a big thing them out. So I think that yeah. We are seeing more opportunities that in the in for cargo carriers absolutely.
Can you specify it all into its training on the wide bodies and your centers.
It I can't really know we look I would tell you we don't have a huge amount of wide bodies in our training centers as more and we have some but it's more a narrow body fleet now what you see though is the more up more airlines actually using even narrow bodies to carry.
Increased levels of cargo because the lions share of even though there's dedicated cargo carriers a large length share a cargo is carried in the belly of aircraft. So yeah, there maybe lets passengers, but there's more cargo and a lot of cases, so I can't really won't be specific than that.
And just one last follow how much demand you see for pilot training in the United States or opportunity given the retirements, you've just seen and potential for all those in October.
I think like this the their level of activity for training right now in North America is pretty good is pretty high.
I would say one thing I would point you've done this year simulators based training, but I've put you live the on the training pilots. Its interest you might think that you talked about.
For those of pilots at that there will be no demand for pilots, but when we look at the industry overall dynamics over next few years two three years.
Thank you.
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