Q2 2021 CAE Inc Earnings Call
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[music].
Good day, ladies and gentlemen, and welcome to the C.E. <unk> second quarter Conference call. Please be advised that this call is being recorded.
I would now like to turn the meeting over to Mr., Andrew I know you May now proceed Mr. arnovitz.
Good afternoon, everyone. Thank you for joining us.
We begin I'd like to remind you that today's remarks, including managed and they work for fiscal year 21 answer. His question. It seemed forward looking statement.
Forward looking statements represent our expectations as of today November 10, 2020, and accordingly are subject to change such statements are based on assumptions that may not materialize and are subject to risks and uncertainties actual results may differ materially and listeners are cautioned not to place undue reliance on these forward looking statements I just.
Script, one of the risks factors and assumptions that may affect future results is contained in the annual mdna available on our corporate web site and in our filings with the Canadian Securities administrators on SEDAR at Triple double you exceed our dot com and the U.S. Securities Exchange Commission on Edgar.
On the call with me. This afternoon are not though see president and Chief Executive Officer, and Sonya Branco, Our Chief Financial Officer.
After remarks from Marc and Sonya will take questions from financial analysts and institutional investors.
Following the conclusion of documenting curious well open the call to questions from members of the media [laughter].
Let me now turn the call over to Mark.
Thank you Andrew and good afternoon to everyone joining us on the call.
I'll first discuss some of the highlights of the quarter.
And it's Tony I will provide additional details about our financial performance I'll come back at the EM to talk about our outlook.
We began the fiscal year just felt the brunt of the pandemic wore down and while we're managing through it still difficult environment. Eight months later, we're starting to see the results of our <unk> cost and cash actions and our initiatives to strengthen our market position.
We drove solid sequential improvements in our second quarter. Once your testimony to these efforts into the resiliency of our business, which is largely recurring and driven by regulation.
We delivered 13 cents of earnings per share and we generated $45 million a free cash flow, which is a good reflection of a cash generative nature fees business.
We also booked $660 million in new orders for <unk> 0.95 times book sales ratio.
We saw sequential improvement across all business segments in the quarter, most notably in simple where revenue increased 47% compared with the first quarter.
This was driven by 49% average training center utilization and the delivery of 10 full flight simulators.
[noise] demand improved in both commercial and business aviation training.
The latter recovering more rapidly driven by a relatively higher level of activity involving the global installed fleet of business aircraft.
Civil enjoys a high degree of operating leverage leveraged in training and the higher volume helped drive is operating margin back to the double digits coming in at 14.2%.
We also continue to book New orders with civil finding training solutions contract valued at $353 million.
These included three full flight simulator sales.
Your business Aviation training agreement, what a charter a company in the United States.
A five year exclusive trainee extension with Virgin Atlantic a to your business Aviation training agreement with extra jet aviation and it to your business Aviation training extension with Vista jet.
[noise] defense, we also began to see a more positive picture than the first quarter with some movement not program impacted my coli related restricts, Kevin and the resumption of certain training operations.
Defense revenue grew 8% over the last quarter and operating margin improved to 8%.
Notwithstanding a still challenging environment defense booked orders were $278 million, including contracts to continue providing fixed wing flight training and support services to the U.S. Army at the C doors and training center and to sport Leonardo would able you won three died and easily once.
Nine full flight simulators.
Other notable contracts, including providing United States Air Force, what upgrades and enhancements to both the KC 135, and see what 30 age aircrew training system program.
Depends also received orders for maintenance and logistic support services for the German Air forces Youre fighter training devices and to support the development of a single synthetic environment for the UK strategic command.
In addition.
We were awarded a prototype in contract just support the U.S. Special operations Command Global situational awareness program.
Well leveraged synthetic environments diffuse data into a common operational picture for improved planning and decision support.
And then healthcare revenue grew by 66% compared to last quarter and was 22% higher than last year.
With the benefit of additional volume and the CMM commencement of Sea Air One Ben later deliveries healthcare as margin reached 8.6%.
I'm very proud to say that we're continuing to support healthcare workers and the fighting has come in 19 with complementary webinars and learning modules for clinicians.
We recently developed pathogens up high consequence learning logical to help prepared clinicians for Texas disease outbreaks.
Not only is this the right thing to do being there for our customers and frontline workers in this difficult time I also believe that so many see as a leader in developing training content in the healthcare space.
With that I'll now turn the call or on yet will provide additional details about our financial performance.
Return the call to comment on our outlook.
Thank you Mark and good afternoon, everyone.
Consolidated revenue of $704.7 million was up 20% compared to the first quarter and is 21% lower compared to the second quarter last year.
Segment operating income was $79.3 million compared to a loss of $2.1 million before specific items in Q1 and.
And then income of 126 million before specific items last year.
Quarterly net income before specific items was 34.2 million or 13 cents per share, which on the same basis compares to negative 11 cents in Q1, and 28 cents in the second quarter last year.
Free cash flow was $44.9 million in the quarter, which is an improvement over the negative 7.1 million free cash flow result last year.
The increase results, mainly from a lower investment in non cash working capital the suspension of the dividend and lower maintenance capital expenditures, partially offset by a decrease in cash provided by operating activities.
We expect to be free cash flow positive for the year based on our expectation for continued positive operating cash flow and the expected timing of reversals in our noncash working capital account.
Return on capital employed before specific items was 7.2% this quarter compared to 8% last quarter and 11.5% last year.
Growth in maintenance capital expenditures totaled $15.2 million this quarter and for the first half of fiscal year totaled $33.2 million for <unk> relative to our outlook of approximately 50 million.
We expect total capex of approximately 200 million for the year commensurate where opportunities to invest incremental capital would accretive returns and free cash flow.
Income tax recovery this quarter with a million dollars, representing an effective tax rate of 14% compared to 17% for the second quarter last year.
The tax rate was lower due to the impact of restructuring costs, partially offset by the change in the mix of income and losses from various jurisdictions.
Excluding the effect of the restructuring the income tax rate would have been 25% this quarter.
Our net debt position at the end of the quarter was $2.4 billion for a net debt to capital ratio at 50.1% and net debt to EBITDA before specific items was 3.16 times at the end of quarter, all told between cash and available credit we continue to have approximately $2 billion of liquidity.
We are making good progress with our recently announced restructuring program intended to enable you to best serve the market by optimizing our global asset base and footprint adapting our global workforce and adjusting our business to correspond with I guess, that's a level of man and injuring structural efficiencies that we will drive these.
These measures include the introduction and the acceleration of new digitally enhanced processes, such as remote installations and certification and work from home practices.
We continue to expect to record the restructuring expenses of approximately $100 million to put the entire program, which will be carried out for fiscal 2001 and into fiscal 22, consisting mainly of real estate assets.
Asset relocations and other direct costs related to the optimization of our footprint and employee termination benefits.
Actions include the consolidation and some facilities that we gain efficiencies of our operating from operating from larger center and we also think relocating several trading assets to optimize utilization taken.
Taken together. These measures are expected to enable you to emerge from current period from a position of strength and we expect to fully realize our annual recurring cost savings of approximately $50 million starting in our fiscal 2022.
We began executing a restructuring program this quarter and I've got to the end of September we had incurred $51.1 million of restructuring expenses.
With that I will ask Marc to discuss the way forward.
Thanks Sonia.
The COVID-19 pandemic continues to be a day today global reality and we're encouraged to have learned yesterday on the progress being made to discover a vaccine to this terrible affliction that is so deeply affected the lives of so many.
As we consider the step change improvement in quarterly performance that we just delivered we recognize that the continued pace of sees recovery from this point board will be highly correlated to the rate at which travel restrictions and warranties can be safely lifted and market activities resumed.
Short term visibility in that context remains limited however, I take confidence in the fact that we're in a better position now than we were at the start of the fiscal year and we continue to expect a stronger second half.
Looking beyond the current period.
We remain encouraged by sees long term prospects.
We're seizing opportunities to strengthen see internally during this period.
<unk> as you've heard him Sonia our restructuring program currently underway is on track well.
We're also well positioned to bolster our standing as the global market leader in our field through the application of advanced technologies and a bike span the <unk> the aperture of our market reach.
We're continuing to invest to cease capabilities to revolutionize our customers training and critical operations, which we digitally immersive solutions and to increase our market share.
And we remain confident that she will be removed from the current period as an even stronger company.
Looking at each of our business segments.
It's simple.
As the global fleet gradually recovers its daily flight to resume service.
We expect to continue to expand our market share and secure new customer partnerships with our innovative training and operational solutions.
We continue to have discussions with airlines about potential outsourcings and partnerships and while we don't control the timeline of those agreements we expect some of our pipeline to come to fruition in the period ahead.
At a steady state business aviation training represents about a third of our civil business and based on global aircraft fleet activity levels. We expect this segment to continue recovering faster than commercial aviation.
Demand for civil full flight simulators is driven by new aircraft deliveries and one of the total market is currently much smaller we expect to maintain our leading share of available full flight simulator sales.
We benefit from a large backlog of customer funded full flight simulator orders and we expect to substantially deliver this backlog over the next couple of years.
Including 35 to 40 this fiscal year.
In defense.
We're managing through a transition year as we work our way through the short term challenges brought by the pandemic and as we ramp up new leadership.
The long term outlook for defense continues to be for growth supported by a large addressable markets for our our innovative solutions and the realization of the benefits of our bolster team and how that will that will that will bring to bear.
I'm very encouraged by our recent competitive wins that large pipeline, which bode well for defense in the long term.
Despite near term headwinds were manic, maintaining our leading position as the training in mission support partner, thanks to our leading edge capabilities and translating physical world into the synthetic world.
We're expanding beyond training to become a leader in digital immersion and the application of its synthetic environments to support analysis planning and operational decision making.
With our expertise in the integration of live virtual and constructive training along with capabilities to address mission and operations support we believe we will make inroads into the broader defense market in the period ahead.
And in healthcare, we also bolstered our leadership to enable C to fully capitalize on the greater market appreciation of the benefits of healthcare simulation and training to improve safety and to help save lives.
The pandemic is serving as a catalyst to accelerate digital transformation across the enterprise and in healthcare, we seen emerging growth vector with the ramp up of distance learning this fall.
While still early.
I am encouraged by our progress in including New tools. We just recently introduced on how to deliver training using our platforms maestro and see learning space, which offer remote and distance learning capabilities for virtual clinical examination and Tele health training.
In closing.
I'd like to thank all of the employees that see who are collectively responsible for these solid results against the macro backdrop that has big complex and of course, it goes without saying under higher than usual uncertainty.
Our employees have conducted himself through these challenging last eight months with troop professionalism and teamwork retaining an impressive and singular focus on serving our customers as their partner of choice I'm truly inspired and humbled to lead this great team of people here at sea.
And I couldn't be prouder of how we rose up against an incredible macro event, that's almost been like award time effort and our rising from it stronger and even more aligned together with that I. Thank you for your attention and we're now ready to answer questions.
Thanks Peter.
These questions from analysts and institutional investors.
Absolutely. Thank you well now begin the question and answer session for analyst. Please note. If you would like to register for a question Chris still one followed by the four on your Touchtone phone heels you retreat from two its nose to request. If your question has been answered and you'd like to which will you but just.
Jason first a one follow up but its three.
One moment. Please first first question.
I guess first question comes from the line of Steve Arthur with RBC Capital markets. Please go ahead.
Great. Thank you very much just a couple of questions first on the training center utilization before.
The 49% I realize is that there's an aggregate of many different training centers different simulator types, but.
But just wonder if you could expand a little bit more on the dynamics within there for example, the utilization that business jet training versus commercial or in addition to the recurrent training.
Any signs of more transition training as pilots move around for for different aircraft types.
Okay as Steve I think that.
Maybe slightly higher in business aircraft.
Been doing.
Somewhat better based on the fact that there's been this has happened has been less affected overall in terms of the flight activity, which is the driver for us.
Commercial I think its say, it's kind of plateaued at this as we said last last quarter, it's pretty much in line with the activity on the the.
The aircraft in the commercial aircraft that are being utilized right now if you look at that number.
The market right now there's been it's been weak overall for commercial aviation there has been a bit approximate 50% recovery in daily flight activity, which is obviously well off the lows back in April which.
Which explains part.
Part of the explanation for our sequential performance here, but.
It has more or less plateaued in recent months you know as we went into the fall with the second wave and everything business aviation as I mentioned I've been recovering faster to commercial and I continue to be bullish on that because it is it does represent about a third of our civil business.
And if you just look to put some numbers around the business jet cycles in the United States and Europe.
Our within about 10, or 15% pre pandemic levels, which is pretty impressive when you when you think about it.
And I.
Anecdotally I put away that provide a little color and last quarter on this as our charter operator customers are seeing significant volume in business aircraft from customers.
Or new to private jet travel in and in my experience Kent from nearly 35 years in this industry.
Once people experience private jet travel there tends to be a high retention rate.
So that's the kind of color I would give you right now with regard to utilization.
Okay, and it's still the same dynamic within the two more and more wet training with business jet training and.
And a lower but growing amount in commercial.
Yep, that's about right yes.
I guess just related to that just any update at all on the nature of the potential outsourcing agreements with airlines of course, you can't get into any customer specifics, but are those kind of conversations still advancing and what's the reception with the airline customers.
No absolutely there's several discussions on the way that hasn't changed it.
The dynamic continues airlines are more amenable to partnering with us.
It's become more resilience and flexibility in their training operations bite and turning.
Fixed cost into a variable cost.
You can well imagine that airlines are pretty busy these days in terms of managing our operations, but I do believe that somebody's deals will come to fruition.
Yes, it's just a natural for us so, but we'll keep you informed as the we don't control the timeline certainly in the basin.
Okay, and I guess, just a final one for me just on the on healthcare segment any any color you can provide on the contribution from the ventilators in the revenue in the past quarter or a sense of the scale of that 10000 unit order.
Well in in the quarter, we had approximately $7 million of revenue that came.
From the healthcare sector that came from the ventilator that it's modestly profitable and Thats, what we expect.
We have been deliberate not to create expectations on a profitability of those van layers, because it although I do expect them to be profitable and cash generative well imagine that.
What we're doing here is reacting primarily to what's really is a biological wartime effort here due to our fight against both the 19th.
Extremely proud of what we've been able to do but yes, our top priorities on the contract are really making sure all the.
Quality of those devices and speed to market, because obviously, we don't want to put it in the hands of the public health.
Threes as quick as we possibly can.
Does that does that answer your question Steve.
Yes, I think it does I understand that and I appreciate it okay. Thank you.
Thank you for your question.
Our next question comes from the line of Konark Gupta with Scotia Bank. Please proceed.
Thank you and good afternoon. So.
So maybe just wanted to follow up on the utilization.
Trends you spoke about commercial versus business aviation.
Commercial obviously, there there are multiple silos, there as well like narrow body wide body as well as cargo a.
I wanted to understand given obviously of wide body fleet. So the man's pretty much grounded by 50% or so on narrow body might be doing better.
Any sense you can provide on the utilization rates for you guys.
On narrow body side as well as cargo given a lot of airlines and also saw accelerating.
Messenger to fit a convergence of these days so how are you leveraging those opportunities. Thanks.
Well, we don't I would break it down right down to that level, but I could tell you that as we said before but two thirds of our our training footprint is narrow bodies actually it's about 75% actually of our fleet is narrow body. So we're well exposed to that and actually a lot of aircraft those out we do have.
On wide body somewhat are being used for cargo and we are actually seeing.
Actually a lot of narrow body airplanes being used for cargo.
And be converted to that end.
Right, but are you seeing any significant increase in cargo trading mark.
Well definitely there's more I'm not saying you don't know there's lot more cargo activity and.
To the extent that we trained cargo, yes, we have seen improvement in that.
In the car and the train Thats related to training of cargo aircraft crews for sure.
I just would break out the number for you.
Okay No problem, that's good color on the moving on on the commercial side backs.
Obviously in Mexico, so getting quite close to three deprecation I guess, a couple of airlines and the North American market have spoken about on grounding them pretty shortly.
And Boeing has disclosed the backlog sitting around about 3300 aircraft. So my question is really on.
If you can help us understand.
The size of the potential opportunity for C from backs in some Sofia.
What is the incremental demand potential similar dose as well as training Thats Max comes back or do you do see maybe a pent up demand. After they have delivered maybe a couple of hundred elsewhere.
Well I don't think we'll obviously there is a short term dynamic thats occurring here, but I think on that aggregate when you look at all of the.
That whole order book that you mentioned Thats bluntly I mean, it's kind of very solid order book as we know very large and when you look at the.
Basically a excluding lessors, there's about 73 operators at the moment, who account for about 1300 of those orders on the Max that we know they don't currently have a Max train solution.
So that gives you an idea of what the opportunity for us over time, and I think that the dynamics will be similar to at a steady state to other narrow body deliveries that we've had so in the past year, we give you that the the market driver statistic that we use that.
Every bought 30 narrow body deliveries necessitates a simulator to market and now that it's clear that the Max will require simulation based training you expect that.
Airlines that.
Previously, where we're going to be able to let's sit at a Max an LNG fleet and we're going to transition to a match well. Maybe then they are going to be well most likely to be less using their LNG simulators and because we more advantageous to them to move to waste a permanent solution using macs.
And layers or outsourcing their training.
Two providers like ourselves, which offer Max trainer. So I guess that gives you some of that.
I guess that steady state I expect this to be just like another narrow body type.
Right and I I think Boeing was three so the mentioning about.
Some updated the pilot training requirements that the regulator to south from the US Canada Europe have mapped out.
Have you been involved in those discussions at all or do you do expect discussion going forward, well I wouldn't I wouldn't break it down ill leave it there.
Boeing and surety overall question sort of mass, but I can tell you, though that we have high level meeting I personally am on a call every month with senior leadership are returned to service at Boeing we're partnered to them to get the fleet back in here and to support the authority and our customers because we have.
The great majority of sales of simulators for some 37, Max we have so you could imagine that were that were involved but in terms of the day the decision, making is coming out of the authorities.
Okay. Thank you for that that's all my questions.
Thank you.
Our next question comes from the line of Savi, Shawn Moon with BMS. Please proceed with your question.
Yes, good afternoon, and thank you.
So we're getting a lot of question about this.
Hi that wage program I guess and.
I think you've collected to date somewhere around 80 million again, and I think in this quarter down $35 million should.
Should we consider these guys.
Income that would have otherwise basically subsidizing or off fighting what could have been wage.
Wage reduction or headcount reduction or things like that or is there a bottom line impact from these.
Which subsidy program on the first half results and if you can.
If you have visibility if you can give us an idea what do you expect them both kind of programs in the second half of it.
No. So you should absolutely look at it as as as the opening of an offset as you as you mentioned so far the mitigation measures we sought out a different government programs globally and we've got about I think 20 different countries.
The Lion share is really in the Canadian program. So the.
The other countries, sometimes literally just a flow through that the government's Hughes.
You too.
To.
Subsidize the employees the Canadian progress slightly different so in total as you mentioned $35 million in the quarter, but as you remember some of the measures that we took quite early on a.
Was highly impactful 2400 people.
Furloughed or reduced work weeks and so on and so what this program essentially allowed to do is to call back those furloughs and employees and work week. So so essentially neutralizing the impact so so it's relatively neutral.
As for the future. The program is continually being changed it's still there until June and lot of moving parts to it really kind of be able to answer that question.
Okay.
Okay, that's great.
The other question I had is on the debt.
On the good training program I think you have a number of good at training program with various airlines.
Have hubs. These programs have been kind of scaled back Im just trying to understand how kind of airlines are looking at some of their.
I've been initio training requirements going forward the scaling back what are you seeing that kind of.
The main was their original plan despite the pandemic.
Well, that's exactly the case a fatty it people have maintained their original plan forget it takes at least the nuvo.
Nuvo to two years to to create a pilot and actually we came out with our yes.
The pilot forecast just yesterday, if you have a look at it that I still think it's a good it's a good career to become a pilot and because we weren't up a pilot shortage situation before as you will recall in that in the not so distant past and although.
Although obviously, but you know the.
The professional business affected significantly in the shorter term because the goal with the wave of retirements as well as basically.
Movements in the the workforce will will recover and we will need and quite a number of pilots going forward. So going back to your question. The all of our programs have been maintained in fact, we won more business. We won for example, with Boeing we now set last quarter a contract to deliver tropez for them. So I haven't seen any.
Pack in fact, our flat flat our flight hours are are basically the same if the only effect that we've had is where we've had to close centers temporary like ever example, like in Australia in Melbourne to because of Covidien thats affected our flight operators, but in the end of the day going back to.
Were paid demand forecast, what we forecasted demand for 27000, new pads by the end of 2021, and if you think about it takes two years to to make a pilot. We you you want to make sure that you maintain it and that's what our airline partners are doing.
Okay. That's great color. Thank you and maybe one last question you said 35 40 deliveries full flight simulator this year.
Do you have enough visibility can you give us an idea what's kind of the order run rate do you expect this year.
What what kind of runway you inside this that run rate on new order sales go ahead.
And the question [laughter], Yeah, I think that you know what we've said is that.
Is that that we expect order intake order intake or order sales number of tends to be lower this year, reflecting the environment, but that also gave at the orders that well, we'll keep and expect to keep a market leading share of that.
Yes, that's exactly right.
Thank you.
And thank you.
Next we have a question from the line of Kevin Chiang with C.I.B.C. Please go ahead.
Hi, good afternoon, Thanks for taking my question.
That's good color on the excuse of how you think about it so on the us so if I looked at all of.
In the quarter, you did a mid teen margin with utilization of 49%.
The last time, we saw your margins around these levels utilization of.
Somewhere in the Sixtys.
I know mix plays a role and you've obviously taken a lot of cost cutting measures here, but.
Do you think you can get back to pre pandemic civil margins.
At a significantly lower utilization rate than you were seeing.
I guess pre crisis, just given where your revenue mix sits today.
Well I think maybe comment on the quarter first and this this.
We're comparing a highly impacted Q1.
Versus kind of maybe a little bit I guess more stable.
Stabilize dynamics in Q2, and and what a highlight of the model has really good operating leverage rates. So we saw more volume on the.
On to the utilization and also like you said mix mix matters and has an impact. So there was a higher proportion a faster recovery on back what is generally higher yield but also there was a higher volume on the product side. So you'll remember that there was only two deliveries last quarter. So we.
<unk> revenue is driven on the delivery side and so 10 in this quarter.
Also on the volume and drive the leverage there going forward I think listen it's a bit early to kind of give outlooks for for the future for upcoming years, but you know that's.
That's the reason we engage in this rich restructuring program and and really kind of.
Focusing on internal processes, the optimization of our asset base footprint really focusing on digitally enhancing processes and and kind of taking the lessons learned that the pandemic anymore and becoming even more.
More efficient right and so driving 50 $50 million of recurring structural savings for upward 22, and on and so that that will be part of that conversation because the volume doesn't necessarily have to come up at the same level or at the same speed to drive a higher level of profitability.
I appreciate the color there.
Just turning to healthcare it looks like.
A little bit of a leadership change there with Heidi wood.
Just taking over as.
As it has been appointed as President and I think Mark you mentioned some of the the opportunities that you see within healthcare.
Materialize should during during the pandemic just wondering as you look at those opportunities do you see those as being complementary to the to the previous strategy strategy had within healthcare or.
How should we think about this side, but no kind of pivoting towards another direction and it feels like the division has been a bit of an incubation phase for Argus quite a while now just wondering when you. When you think that hits an S curve within its growth trajectory and that kind of breaks out of this kind of 30, some odd million dollars quarterly revenue it seems.
So generally pretty consistently right now.
Well I tell you I am I am very bullish on the Heidi Wood, leading our medical division absolutely sure about that up I.
I think if anything if any anything.
Anything's been.
It's going to be propel going forward.
Post pandemic one of them is going to be the propensity for simulation based training in the in healthcare and I think what we were quite happy and I know I just got a route headed review would Heidi with regards to the healthcare Division then they're very very very competent.
Complementary of the people in the organization to products and services suite that we have as I've mentioned before.
The products that we have in the healthcare division are.
Very profitable.
In lot of cases more more profitable than in our in our core more core divisions and it's a question of volume is a question of volume. We noted that we expected. The volume is there should have been meeting with a lot of customers and Kim Cocklin Kim we've been very encouraged so it's I would I would basically say that.
We're pretty good executive in charge here at executive with a lot of bandwidth lot of experience and a lot of business experience and that is singularly going to propel our products and services and lead the workforce to what I know is the growth Thats out there in this business, which is only going to get better.
Her in this post pandemic world.
That makes sense and then just last one for me.
Yeah, I think of the Minnesota, PUC kind of repositioning some of your assets just given all that's that's happening in the world today and you to put your pilot outlook.
Yesterday Im just wondering when you think of repositioning.
Your assets do you think of positioning them based on kind of decade, local while you see pilot demand and where you see.
Various growth rates across various departments or or you're taking a more near term approach and trying to position those assets, where you see maybe near term growth, whereas Asia Pac, but you were turning faster to travel and some other markets are a little bit more constrained because of travel restrictions.
No, but just like the rest of our business, we always take a strategic view on it and it's certainly not a short term consideration and as I mentioned, when we talked about the restructuring and the asset relocations and somebody the May trade center consolidations that we're going to do that we're having some of them that we've announced already.
He is mainly looking at the what's what is going to be the market demand or sort of the vendor we expect to be out there based on the forecast of the industry's recovery and of course, the conversations with that we have with airlines around the world and business jet operator.
Operators I mean this is one off again crisis favored like just on favor is the leader in one of the.
Consequences of that or or or or maybe an artifice of that is the fact that we have conversations with the majority of the world's airlines because there are customers in one way or form so we're able to get a pretty good view of what training activity should be like over the next two to five years and.
Thats, what we that plus the I add a forecast is what we use to basically plan our footprint going forward.
That's it for me. Thank you very much for taking my questions.
Thank you.
And we now have a question from the line of Cameron Doerksen with National Bank Financial. Please proceed.
Yeah. Thanks. Good afternoon question on on Defense, Marc you had some prepared remarks on the defense business there.
I'm just wondering if you can go into maybe a little more detail on what the game plan is going forward to improve the profitability and defense was it because as you know it has been.
Again for a number of quarters.
Yeah, well look I think first and foremost I think is.
You know I always say, there's nothing wrong with the defense business had a few $100 million of orders when fixed [laughter] I see that and I say that the team all the time, so clearly it's about growth and you throw more growth and of course, we when we bid on projects, we certainly bid to be able to to go into the contract with a market that will be Korea.
To see I mean, obviously the pets at the service our products contract. So first and foremost you had more volume and more volume of course that affects your profitability get because you lower your your overhead rates that in which case that helps you. The even better makes you more profitable and more marketable going forward.
In terms of winning bid at the same time.
We can absorb more as DNA and that's where we get multiyear service contracts that helps as you don't have that it.
Pete would you kill every year and we have a project underway, what we call. It's part of our overall or restructuring and the the cod. The the proven programs that we've launched in learnings to do things differently with somebody insights that we gain during a pandemic pandemic and before.
And we call those internally project Phoenix project Crossroads and those.
To me a couple of more growth will be the result in better execution coupled with.
Growth.
Will result in the you.
Well I, certainly expect to be double digit bargains margins and defense.
Okay. No. That's that's good thanks, and just secondly on I guess, maybe a capital allocation question.
I think the free cash flow is probably trending a little better than what you might have expected earlier in the fiscal year. So I'm just wonder if you can comment on what the when the decision will be made to reinstate the dividend if.
If thats something that we should potentially expect the next couple of quarters.
Well I tell you. The capita account capital allocation priorities Havent changed.
We always take a balanced approach to invest in.
Our first priority, which is accretive a sustainable growth opportunities, while maintaining a solid financial position and that's what we're going to be doing.
The current returns to shareholders. So you don't have to have been a bit there at our past obviously, it's always been a function of level of excess free cash flow and it's an ongoing discussion we have with the board. So I think we have to look at things on a case by case basis, we go but a lot of we see pretty interesting growth opportunities in front of us right now.
Okay Fair enough that's all from me thanks very much.
Thank you and we now have a question from the line of Ben will be easy with digital Bank capital markets. Please go ahead Sir.
Yes, good afternoon, and thank you.
Just on defense could you provide maybe an update on the large projects contract that were impact.
Early independent make it maybe the mix between equipment and services Youre seeing these days.
Well I think you have been once we said this year is in defense is a transition year because of some of those that issues that we have on large contracts contracts them to lease, which we were we were literally tools down and indicates some cases still tools down and the level of the less.
Traffic in some of our training centers because of pandemic related.
Restrictions.
Certainly beyond this current year, we see a growth business.
And.
I'm quite encouraged with our new defense leader, Dan Gelston at the the the amount of insight. He is driving business. The amount of leadership in energy is driving years I'm quite confident in that in terms of product service mix, it's pretty similar to what has been the best this when you want to add to its still its still.
I think a higher proportion on on the services side and the product side.
Thats being reflected in the margin.
At the moment, but two thirds I think you have to get to their incident.
Okay.
Thats, great maybe could you share any thoughts about your expectation for the new leadership under a Daniel Gelston and maybe if you could give an update there related to your active bidding proposal. The amount that you tend to disclose every quarter. Thank you.
Okay.
Well I think at a high can sit in previous question I'm very pleased to have.
Someone of dance caliber on board to see.
That has very positive energy that he brings to the team in defense.
And you know I'm very very confident it's going to do great things to bring out the full potential of our business.
Which.
Going back to a question that.
That was previously said I admittedly was not the case for the.
Last couple of years, so he brings a wealth of knowledge and experience.
Specifically in the kind of business that we have in running and assess a company.
Ed Special Security agreement, where its name company needing that to be able to sell for example, the all branches of the us military which we do he understands the little the landscape within the current required requirements in defense for.
Multi domain.
Warfare and the real.
Going forward, what is going to be training for to deal with near peer.
Threats that are out there, which is different he understands the texans technical technological capabilities of C and it really how to leverage them in that high value areas like the contract that I mentioned during my remarks.
The single synthetic environment or special operations command at Ges has using that example, so look we've made some structural improvements in defense.
And so look I think stay tuned data, we're confident that defense is a solid growth business. So longer term in the latter end your question I.
I think the the number that we have right now is $4.8 billion.
Okay. Okay, that's great and last one for me you talk about the growth opportunities how should we be thinking about Capex post fiscal 21 as you there might be some catch up given the growth of Fortunately seems you foresee.
Well.
No I think.
We just came out the guidance for this year so at a cap.
Capex to date of 33 million, though is tracking a little under the 50 million that we provided as guidance and planning for a $100 million for the year beyond that I think as I think we'll wait until may.
March and May so some of that Capex is is.
As related to the footprint optimization as we consolidate training centers and.
And of course, we will pace investments with the level of demand and in line with customer contract, but essentially where we have and we continue to see some opportunities for some platforms, where there's demand where there are these opportunities capex deployments drive a.
Nicely accretive returns and and really within a five year horizon are driving 20% to 30% incremental returns and that's a good proxy for cash so where we have we continue to see those opportunities will be will be acting on.
Okay. Thank you very much for the time.
Thank you.
Now we have a question from the line of Doug Taylor with Canaccord Genuity. Please proceed.
Yes, thanks, good afternoon, and thanks for taking my questions just a couple for me.
Firstly with respect to the restructuring benefits the $50 million that you were targeting and I'm sorry, if I missed it but can you update us on where you are what was recognized within the quarter or how you now expect the remaining benefits to ramp over the coming quarters.
So we incurred $50 million of cost this quarter and will sell it.
Ill kind of go into Q1 of next year, but the bulk of the of those charges. We expect this year, but there are some longer lead items with you know asset relocations and facilities optimizations now in terms of the benefits of the guidance and the info is $50 million of recurring structural savings.
Starting.
Fiscal 22, so we just started the program and a good part of that program as a footprint asset optimization would require some bit of time to consolidate this affiliate and also.
Mark was talking about all the digital process enhancements et cetera that are underway and so on an ongoing throughout the year. So, but we'll really start seeing the benefits come through next year or maybe some a little bit this year, but really next year $50 million of recurring structural savings.
That's helpful clarification.
My second question is with respect to the types of deals that you're looking to potentially cut with some of your airline customers for outsourcing training and its certainly exciting growth vector during this pandemic. So.
So when and if that happens can you speak to whether they're incremental investments that would be required on your part or will we be taking on additional capacity or would all of the potential business you would be.
Source to you be you'd be able to service within your existing portfolio and infrastructure that'd be helpful. Thank you.
I think it depends of the deal obviously that we look at but.
If we look at the past airline outsourcing. So we've done some you know there's been quite a number of different types, but in lot of cases, what we take over for example, the partners existing assets think above what we did with Japan Airlines, Singapore Airlines.
So they basically contribute their existing training.
Training assets or simulators, so thats, one way of doing it so either way we look at it at all of our view it has to be accretive to fees.
Gulfport Gulfport picture and the.
And I would expect that sometimes we're going to be combining assets be able to do that.
Okay. So is there any go.
Go ahead.
Go ahead Harry.
Yeah.
I was just going to ask I mean, given the pandemic is obviously new phenomenon for the airlines if that has changed the.
Decision, making with respect to outsourcing to favor a certain.
Type of outsourcing arrangement versus prior cycles.
I don't think so no I think look and yet it's usually the same kind of dynamic if you're an existing airline and you have a trading operation.
You you still have it don't forget arch and that's a great thing of our business. It's a regulated business every six months typically pilots have to go back for training. So if you're an airline you have to have either have the capacity for all your pots and be able to train on a regular basis.
And to take advantage of our our necessary initial training as you based that ties retire or pads for low to the IP move it in Europe pilot workforce. So you need the infrastructure. So if you already if you are already in airline and most likely you have an infrastructure. So typically what you bring into the deal.
Is that.
Those assets and we are very good above because that's our business and we do it for you.
A very large number of airlines to tune of a million flight hours a year a million trading hours a year, we're very good at extracting maximum utilization by efficient scheduling fishing.
Delivery the courses. So typically what we would do is has less of a need but.
For and then we are able to offload some of that capacity and sell it for third party training. So I wouldn't expect that dynamic to change very.
Very much from that standpoint, except to say that in this kind of environment, we have more discussions because people want.
Redeban understand that because if they can make their cost structure, lower which you could certainly do and more and perhaps even better make it variables only use.
You only pay for what you use when you use it because typically for example, the western World.
In a normal year, which of course this is not a normal year, but seasonal patterns or you don't trend. The summer because you are fine and but if you. If you have your training infrastructure, then you're paying for their high end goal being advantage.
The only thing of course is that these days.
Obviously with the pandemic.
Ill.
Phil rare very much out there pilot airlines have a lot of their place. These days and this is typically the same themes.
So hopefully that gives you a bit of a broader color. That's very helpful. Thank you very much.
Thank you. Thank you.
Thank all the members of the investment community for their questions with the tighter maybe I'd like to now open the call to members of the media should there be any questions from members of the media.
Thank you know we're going to continue on this is a question and answer session to the press media. If you would like to register So question. Mr. One followed by the four.
Members of the press and media we welcome you to register your questions Press. The one followed by the full.
One moment please.
The first question from the press media comes from Raul MRO would split the Canadian Press. Please proceed with your question.
Hi, Mark two questions. One is you talk about how the recovery is going to be closely tied to the lifting of travel restrictions do you have any sense of timing of that or if your view on the timing chains I recently.
Lab to save you as everybody else.
Be very frankly that hasn't changed I mean, we we model our planning based on the I add a forecast that they.
At the highest level and thats complemented with discussions that we have with individual airlines because it's no exaggeration that the bulk of the world's airlines our customers one way or another so I think that we that translates is I add a forecast about a 66% reduction in passenger traffic this year. So thats.
What we would use overall and that also calls for air passenger traffic to recover to 2090 levels. In late 2023 early 2024, yeah, maybe that gets better because of.
On news, we had yesterday, maybe but you know to hopefully does that would be great, but our our planning is hasn't changed.
From the statistic I just mentioned.
Okay and the second thing is I'm wondering in terms of defense spending with the New administration us coming in are your expectations of orders or business going to change.
No no and the reason I would tell you to two reasons number one is that.
First of all I would tell you that the day that said the orders that we can get a see a being a proxy to the size of U.S. Defense Department I would be very happy.
I think we have lots of opportunity to grow within the defense budgets that are out there today and are perceived to be out there under any reasonable scenario will in part. The other thing is that the products and services that we provide we by definition align ourselves to the defense strategy and.
Do it expected defense, where the money is going to be spent over the next few years and the great thing about for example, governments and specifically if I was to use the largest defense market in the world to Us defense departments.
Basically they tell you what they are going to spend on or what you know over the next few years. So.
Our investments in research development and bidding activity are very much aligned to those that's on the French priorities. So I feel very good about our prospects for growth in the next few years.
And and then we and I think one thing thats obvious in there to understand is.
What we do with simulation based training that actually saves money relative to for example training, which you have to do we have to continue to do so if we can move more of that training and simulation based training well, obviously that reduces costs year on year in the spirit of goodness there.
Sure not concerned about new government, reducing spending on defense.
No.
Okay. Okay.
Thank you.
And up next we have Allison the lampard with Reuters. Please proceed.
Hi, So would you expect non U.S. regulators like transportation sales to with the next grounding compared with the fee and as a follow up are you.
Kind of timing are you seeing in terms of bookings for the extreme.
I was low starting with your first question Allison look I can't answer for the regulators, but the comments that I've seen are you saw probably news from the Epay literally today positive comments from the head of the Epay today.
I would expect transfer cannot be far behind typically just because they've been doing there.
Their certification testing in lock steps up, but again I I can't speak for them and the comments that I've seen from the head of ESA Patrick key most recently on the recovery of that certification.
Of the Sept, 37 matched with positive so I would expect that would come sometime behind but again I am not the guidance really can answer with any certainty with regards except that it's all it's all looking very positive at this stage with regards to Max orders were booking him now we we have.
Again, the lion's share of the simulators for the Macs have been won by sea and I was I would expect that we're going to continue to do well there and we're continuing to deploy Max simulators for our own training centers in that regard.
And what about bookings for the training centers when are you seeing those.
When the people coming in.
Well actually the people are trained now I will give you an idea of what for example here in Canada.
The Air Canada has the tumor Max simulators and I can tell you that even though the fleet has been grounded.
That has been around the world Air Canada's maintained that the training of their pies that they had about memory serves about 500 pilots that were trained on the 737, Max and they've continued to keep those pilots trained so trading activity has not stopped. This continued during this whole time because of the time it takes to ramp.
Pilots. So it may take only a day or two to take an airplane out of mothballs, but if you haven't prepared for it could take you literally months to get your pilots.
Ill back up to speed to be able to fly them.
Okay, operator, that's all I have.
Or questions. This afternoon again I want to thank members of the investment community and media for their time listening to us and for their questions and remind you that a transcript of today's call can be found on the website. Thank you and good afternoon.
Thank you and that does conclude the conference call for today, we thank you all see your participation and ask that you. Please disconnect. Your line. Thank you once again have a great day everyone.
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