Q3 2021 CAE Inc Earnings Call
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Good day, ladies and gentlemen, welcome to the C. H E third quarter conference call. Please be advised that this call is being recorded.
Now like to turn the meeting over to Mr. Andrew on if it you May now proceed Mr Arndt of itch.
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's outlook for fiscal year 'twenty, one and answers to questions contain forward looking statements. These forward looking statements represent our expectations as of today February 12, 2021, and accordingly are subject to change such statements are based on assumptions they may not materially.
Lives 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 a description of the risks factors and assumptions that may affect future results is contained in Cae's annual MD&A available on our corporate website and on our filings with the Canadian Securities administer.
<unk> on SEDAR and the U S Securities and Exchange Commission on Edgar.
On the call with me this afternoon on Mark <unk>, President and Chief Executive Officer, and Sonya Branco, Our Chief Financial Officer.
After remarks from Marc and Sonya, we will take questions from financial analysts and institutional investors and following the conclusion of that Q&A period, we'll open the call to questions from members of the media, Let me now turn the call over to Marc.
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 then Sonya will provide additional details about our financial performance I'll come back at the end about our to talk about our outlook.
We continue to manage well through a challenging period.
CAE stronger performance in the third quarter compared to the first half on the fiscal year reflects our ability to adapt quickly to a new normal and and also the resiliency of our business, which is largely recurring.
On a consolidated basis earnings per share before specific items was up 22, SaaS with nearly 70% higher than last quarter, and we had a near fivefold increase in free cash flow to $224 million, which is indicative of the cash generative nature of our business.
We also made important progress to significantly enhance <unk> position for future growth.
During the quarter, we bolstered our financial resources.
With the issuance of $495 million of common equity and we strengthened and expanded our market position with a succession of three acquisition announcements.
In simple.
Revenue increased by 13% compared with the second quarter, driven by 50% average training center utilization and the delivery of 10 full flight simulators.
We also continued to book new orders with civil finding training solutions contracts valued at $329 million.
These included three full flight simulator sales and a five year exclusive business aviation training agreement with bundles where of Germany for the global vision.
We also signed an exclusive training agreement with Marc are a new cargo airline in Mexico, and we signed a five year extension of our exclusive training agreement with Iberia to do all of their training.
And finally, we signed another five year training agreement with Tuohy Airways, a British charter airline and an exclusive two year pilot training agreement with lot Polish Airlines on a broad range of aircraft platform.
In defence revenue remained stable with last quarter, while the defense segment operating margin was seven 5% as we continued to manage through COVID-19 related impacts and disruptions on the timing of execution and deliveries.
Near term challenges are fine day.
Booked orders for $261 million, including a contract with Lockheed Martin for our suite of C. 130 day training devices from the Binational, French and German Q on 30 day trading facility.
We also signed with Lockheed on the supply of the CAE magnetic anomaly detection and extended roll system for the U S. Navy MH 60 Seahawk helicopter.
Also during the quarter defense was a quarter of the award of a contract for the next increment of a multiyear contract with the United States Air Force to provide comprehensive C 138, aircrew training services as well as in order to continue providing the U S Navy with primary and advanced yet it structure support.
For the chief of Naval Air trading at five Naval Air stations.
Finally, as a result of superior contract performance Defense received a sole source extensions award for $2 44 C. Aircrew training services through mid 2027.
Defence also announced its involvement in a highly strategic contract to further develop and extend a single synthetic environment technology demonstrator for the United Kingdom Strategic command.
Single synthetic environment or SSC aims to deliver a virtual world to be used for operational planning and decision support across all domains cyber space Maritime land and air.
This together with the recent awards to support U S. Special operations command last quarter are indicative of the good progress that we've been making with our digitally immersive solutions.
At the end of the quarter Defence one the competitive recompete of the U S. Air Force KC 135 training system contract a program where for approximately $275 million U S. Over the next eight years.
This is a prime example of <unk> ability to renew and expand major long term training systems contracts as the training partner of choice.
And in healthcare, we continued to deliver CAE air one ventilators and segment revenue more than tripled with margins, reaching 10, 7%.
Im extremely proud of what we've been able to accomplish first a rising to the challenge to develop the lifesaving ventilators in a time of breakthrough monetary and meet any of our continued more time effort in the fight against COVID-19.
Continuing to provide new tools and training capabilities.
Support of our customers' training needs during this pandemic. These.
These included solutions like <unk> three one on ultrasound education platform with new remote learning and screen sharing capabilities curriculum development tools for distance learning and Microsoft's holo lens to mixed reality interface, where remote education.
We also expanded our adaptive critical digital learning courses covering mechanical ventilation to include basic advent.
And COVID-19 patient management.
With that I'll now turn the call over to Sonya, who will provide you additional details about our financial performance I'll return at the end of the call to comment on our outlook Sonya.
You Marc and good afternoon, everyone.
We continue to see good sequential performance improvement in the third quarter consolidated revenue of $832 $4 million was up 18% compared to the second quarter and is 10% lower compared to the third quarter last year.
Segment operating income before specific items was $97 2 million compared to $79 3 million in Q2, and $157 $2 million last year quarterly net income before specific items was $60 million or 22 per share, which on the same basis compares to 13 cents in Q2, and 37 cents in the third quarter last year.
Sure.
We had strong free cash flow on the quarter, a $224 million, which is a solid improvement over the $44 $9 million, we generated in the second quarter and as a result of continued good cash flow from operations and reversals and non cash working capital accounts I'm, especially pleased to see that even with the negative free cash flow performance, we had in the first quarter when the breadth of the pandemic.
It hit US we're now at positive $176 $2 million of free cash flow for the nine months year to date.
We still face challenging conditions, but we're confident about our outlook to be free cash flow positive for the year.
Growth and maintenance capital expenditures totaled $23 $9 million this quarter and for the first nine months of the fiscal year totaled $57 1 million. We had indicated in our outlook that we expect total capex to be approximately $100 million for the year and this continues to be ours.
Our growth Capex is directly linked to our opportunities to invest incremental capital with attractive returns and free cash flows.
Income tax recovery this quarter was zero point $1 million.
An effective tax rate of no, which compares to 16% for the third quarter of last year. The tax rate was low for two reasons first the positive impact of some tax audits and second because of the restructuring costs, we incurred this quarter.
Excluding the effect of these elements of the income tax rate would have been 16%. This quarter. The same as Q3 of last year.
Our net debt position at the end of the quarter was $1 8 billion for a net debt to total capital ratio of 38, 9%, which is back within our target range of 35% to 45% and net debt to EBITDA before specific items was $2 six five times at the end of the quarter all told between cash and available credit we have approximately $2 four.
With available liquidity.
CAE is liquidity was further enhanced with the completion in November of a public offering and concurrent private placement of common share for aggregate gross proceeds of $495 3 million.
The net proceeds are intended to fund growth investments, including the three acquisitions, we recently completed and other future potential acquisition and growth opportunities.
Pending such uses we've been we've been using the proceeds to repay indebtedness on our credit facilities and to hold them on cash and cash equivalents.
On the restructuring front, we're continuing to make good progress. The program is enabling CAE to best serve the market by optimizing our global assets based on footprint adapting our global workforce and adjusting our business to correspond with the expected level men and enduring structural efficiencies, we began executing our strict restructuring program last quarter and as at the end of <unk>.
Last December we had incurred a total of $65 4 million of restructuring expenses.
We expect to record a total of approximately $140 million of restructuring expense this fiscal year, which is higher than our previous estimate because we've identified additional measures to optimize our global asset base on footprint plus we now have some additional restructuring related to optimization and integration of our recent acquisitions and.
In connection with these efforts, we expect additional restructuring expenses of about $30 million in fiscal 2022 taken together, we expect a restructuring program to translate into significant annual recurring cost savings to message commencing in fiscal 2022, and ramping up to a run rate of approximately $65 million to $70 million.
With that I will ask Marc to discuss the way forward.
Thanks, so on yet.
CAE is clearly in a much stronger position than it was back from when the pandemic hit and we're bullish about <unk> long term prospects to emerge from this period in a position of even greater strength.
We are successfully implementing measures to fortify the company internally and finding additional opportunities for greater efficiencies.
We've also made excellent strides to capitalize on external opportunities to enhance our market position and deploy growth capital.
We're leaning in and focusing on the long term bolstering our standing as the global market leader in our field through.
Through the application of advanced technologies on a by expanding the aperture of our market reach and we're continuing to invest in <unk> capabilities to revolutionize our customers' training in critical operations and increased market share with digitally immersive solutions.
And while COVID-19 remains a persistent global reality, we're encouraged by the light at the end of the tunnel and we recognized that market recovery is really a question of when and not if.
Fundamentally the secular growth drivers for our business are unchanged.
Resumption of CS recovery remains highly dependent on the timing and rate at which travel restrictions and quarantines and eventually be safely limit lifted our normal activities.
And our end markets.
Now looking at each of our other business segments.
Civil we expect to see a relatively stable performance in the fourth quarter compared to our current third quarter results. The global rollout of vaccines to combat COVID-19 is indeed, encouraging however, the renewed quarantine measures and border restrictions to contain the spread on the virus.
Contributed to expectations for a potentially more.
Track to the recovery period for commercial air travel, particularly for cross border E Trans Continental operations.
At the same time, we expect to continue expanding our market share and securing new customer partnerships with our innovative training and operational solutions.
We're in advanced discussions with airlines about potential outsourcing and partnerships and while we don't control. The timeline of these agreements we expect some of our pipeline to come to fruition in the period ahead.
Business Aviation training has been recovering faster than commercial and we continue to see this trend moving forward.
Demand for civil full flight simulators is driven by new aircraft deliveries and while 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 and deliver this backlog over the next couple of years include.
Including approximately 35 this fiscal year.
In defence, we're managing through a transition year as we work our way through the short term challenges brought by the pandemic and ramp up our reinvigorated growth strategy under our highly piloted new leadership.
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 are bolstered team will bring to bear.
Im encouraged by our new competitive wins large pipeline and our recent success in the security sector with a contract award to provide the United States Customs and border protection with aircraft pilot training services.
This win Leverages the seed Dothan training center, and six commercial and business aviation training centers to deliver simulator and last flight training services on a range of fixed wing and rotary wing platforms.
We were also selected after a highly competitive process.
To demonstrate our capabilities to the U S Army Futures command as part of a synthetic training environments program, which is designed to provide a collective multi echelon training and mission rehearsal capability across the army.
And the takeaway here is that while managing through our current period. We're also focused on the long term and we're investing in our leading position as the training and mission support partner with leading edge capabilities in translating the physical world into the synthetic world.
We're implementing a strategy to expand beyond training to become a leader in digital immersion and the application of the synthetic environment 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'll make significant inroads into the broader defense market in the period ahead.
And in healthcare, we are capitalizing on the greater market appreciation of the benefits of healthcare simulation and training to improve safety and to help save lives.
In addition to our core healthcare business activity, we're continuing to work towards the delivery of our ventilator contract with the government of Canada.
And we're also continuing to find innovative ways to provide even more solutions to make the world a safer place the.
The contract, we announced last week with pure to build and help develop high Tech are sanitizers allows us the great benefit on maintaining manufacturing jobs on the Montreal, while continuing to play a lead role in the fight against the pandemic.
And it's another Great example of CES agility, and leveraging our strength in new ways.
In fact, we obtained this particular contract by leveraging the expertise we've gained developing ventilators as well as the ISO certification for medical device design manufacturing and distribution that we obtained just last month.
She has been an innovation powerhouse for more than 70 years.
World Class engineering intellectual property supply chain and manufacturing capabilities and I look forward to more great things to come with that I. Thank you for your attention and we're now ready to answer your questions.
Thank you Marc.
Thank you.
Net.
We will now begin the question and answer session.
If you would like to register for a question press. The one followed by this fall on your telephone.
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Yes.
As people and you get a demand.
<unk> yeah.
Let me on this Joe said it well.
<unk>.
The first session will be opened to the analysts.
Thank you.
And then most of them day, one moment please.
Our first question.
Comes from the line of Kevin Chiang from.
CIBC. Please proceed.
Good afternoon, everybody. Thanks for thanks for taking my question here.
So if I can ask about what youre seeing from your your custom.
Customers as they prepare the airlines prepare for an eventual recovery.
In air traffic are you, having accelerated discussions about about getting their work force Friday for.
For that eventual recovery and I know I guess earlier depend on that there was a thesis out there of a pilot training bubble, that's potentially emerge as airlines rush to retrain their pilots here that have been furloughed, just wondering what youre seeing.
Sitting in a position today.
All I can tell you Kevin that we're having.
A lot of discussion what airlines as they prepare themselves to.
For the the recovery that will surely come as people get more and more vaccinated.
Bookings what were hearing for forward bookings at the airlines are very high, especially on leisure travel and so we're working we're working with them hand.
Basically a hand to hand, so that they have the proper training. They are private crews trained to be able to handle that.
Upswing now.
Of course this hypothesis of when everybody will be trained so they are keeping their powder drive from that point of view from our standpoint look we're as reflected in the utilization that we have now we're.
We're seeing we're ramping up on for example, 737, Max training or deploy more assets and supportive of that airplane coming back on line looked up.
<unk> training bubble I think not not in material numbers I would say right now it's really going on that really is going to depend at the rate at which the recovery happens and the rate at which for example wide body aircraft that we put back on line.
Relative to the assumptions that are out there today.
Which is.
Basically we're continue to fall which is the.
The ies assets predictions as to when air traffic recovers so to 2019 level. So late 'twenty three 'twenty four.
I think that's the way I would characterize it.
That's helpful.
Maybe just my second question here.
You've made a couple of acquisitions a three acquisition as you noted maybe the one that I thought was the most interesting was with.
With the acquisition of Merlot with <unk>.
<unk> expanded our capabilities into crew management and optimization software.
Is it kind of come through the pandemic can you speak to what you see in terms of maybe other ancillary services. You think you can bolt on to your core business and the other digital solutions do you think you could to kind of growth overall with maybe total market size relative to maybe the way you saw the market pre pandemic.
Well, absolutely we identified this market before that in fact, we were already serving it.
Perhaps on an overly material way, but an example, I would I would point to is for example, SaaS, Ireland I've talked to that before where we basically indicated that particular airline.
Personnel.
We've done only trade deposits our employees with the pilots that were there with the.
With our cabin crew and basically became airline.
Employees when they basically operated the aircraft itself. So it's kind of a complete <unk> resource offering that was just one example of what will you do it of course, we do a lot of that through our fee Park.
So what we're seeing is and now I would do is move more even more aggressively into what I consider is a very large and aggressive mark sorry.
Sizable market there.
Tractive, because it appeals to everything we know into.
But the whole pilot ecosystem remember we're in.
Every part of the pilot ecosystem from training people to become airline training them. Initially on the type of aircraft doing a recurrent training throughout their career and finally, providing as I mentioned through park and opportunities I see airline a complete solution. So that gives us unique skills and insights to offer.
We're a much broader.
Set of services that purely provide training thats, what youll see is doing here and it's a natural the same customers.
Ed.
And they have there is very real pain points in their operations that they will.
In many many cases.
Very very happy to look to someone like ourselves, who can basically take that over for them and provide them synergies and actually through our digital offerings to be able to give them insights into their operation because of just the sheer scale that we can provide that they can't do by themselves.
So we're going into it very happy about the <unk>. The mellow great team that we have their headquarters in New Zealand, great set of customers and I felt very good about that more to be said, but I think it's going to be.
To me a very attractive market for me what it does in terms of dollars on SaaS.
It increases our addressable market and civil from Notionally about $4 6 billion to $6 1 billion and I'm talking pre COVID-19 kind of normalized figures here, but that's what I would tell you.
Okay. That's great color. Thank you very much.
Thank you on <unk>.
Next question comes from the line of Elizabeth Grenfell with Bank of America. Please go ahead.
Hi, good afternoon guys.
Hi.
Calling on Ross' behalf.
Air travel back to 2019 levels in 2023, how do you expect that recovery to play out for you.
Well I think we're pretty had what you got to look for us.
Two things first of all.
I mean, what I'm what I'm.
Talk about that until about commercial aviation travel not.
Business Aviation business Aviation has already recovered quite nicely and we continue to be.
About right now is as we said about 15% of pre pandemic levels.
Based on business jet cycles, and it is the United States than in Europe.
In terms of commercial aviation.
The way it pans out for US is to just watch the airplanes that are flying because our business is regulated so as long as there is two pilots flying those airplanes at the front they have to go back to training literally on.
On an average basis throughout the world every six months so for us it look at the utilization of the aircrafts themselves so but at the moment of utilization of the airplanes sales about 50%.
Yes.
Based on maybe 80% before before pandemic so for us as airlines add more flights and more utilization our business in terms of utilization in our training centers is very very highly correlated to that sort of utilization on the active fleet of aircraft.
And how they are being used in the fleet. So what expect it to follow that trend then.
On the additional color I would give you is that.
We expect that recovery to the narrow bodies sector to recover faster.
That's I think pretty much consensus and thats. The consensus that we get based on talking to our customers, which of course because of our market position represents the majority of the worlds Airlines.
So the fact that the.
The narrow body recovers faster is a good is a good thing for us because <unk>.
75% of our network.
<unk> full flight simulators in our training centers are not narrow body aircraft and when I come back to just additional cover on business aircraft about a third of our revenue in civil also comes from business aircraft.
Which that's important because it's also a more profitable segment, so that factors into it yourself.
Great. Thank you very much.
Thank you and our next question comes from the line of Scottish Salmon with BMO capital markets. Please go ahead.
Okay. Thank you.
Couple of questions first on the acquisitions I guess you addressed some of the strategic.
On a.
Positive mellow, but.
The other two acquisition now that you've kind of had a chance to take a look under the hood clinique that might share with us a little bit about.
The opportunity you see there the integration process, how do you feel about your store acquisition now that you've had a chance to kind of take a look at them a little bit more closely.
The other quick questions to Sarnia, maybe if you can help us.
Clean the desk.
Structuring benefit that you expect in 2022, Inc.
You mentioned up to a run rate of 65 to 70 ramping up.
Is that kind of by end of 2022 like how much of that.
That restructuring benefit should we expect to be realized next year.
Okay, maybe I'll just kick it off fatty look I would tell you with the acquisition of the other two acquisition, which is the FSC a true look no surprises, except maybe to say look we're very happy what we see that's always great.
Obviously, we know our business I think we knew them well.
In terms of if you're thinking about FSC.
They bought since we all of their new simulators from us over the years I sold on their first came back in 2006 I believe it was but so we know them well and very very happy with the team coming on board no surprises on the integration.
And so it's I would say it's.
<unk> on track if not ahead of where we expected to be in terms of true very similar very similar question as you know, they're very down the street from from US here in Montreal, great facilities.
Great bunch of people I think thats, good book of business of which which we knew.
Yeah, I like what I see I think that it reinforces our relationship as well with Boeing I think thats an important one because.
Boeing was their supplier.
Over the Triple seven X on the 737 Max from original equipment simulators. So that's very attractive for us we knew about that but again very happy about what we see in both cases the debt ratio would say is right on track if not ahead.
And then.
I'll jump in on your question for our restructuring so.
We started the program in Q2 on its progressing well now a good part of the program is about assets and footprint optimization. So these are long lead items.
Relocating simulators etcetera on moving people in closing down.
Let's see the leased facilities. So that's underway, we put us a good amount under our belts, but it will continue on over the next couple of quarters as well as kind of a lot of the process digitally.
Digitally driven process improvements underway so.
We're going to see those savings basically come through next year in FY 'twenty two.
At least $50 million of recurrent savings for the full year of <unk>.
So FY 'twenty two as we had talked to and now with the additional measures that we've identified as we continue on this quest for optimization and streamlining we've identified additional measures so different types of locations on opportunities.
That will be starting this quarter and through the new year, the new fiscal year. So those will take a little longer to ramp up and so probably that debt and incremental savings will come through towards the latter end of the year.
And and ramp up to a run rate of $65 million to $70 million.
Recurring annual savings.
Okay, great. Thank you.
Thank you.
And our next question comes from the line of Noah <unk> with Goldman Sachs. Please proceed.
Hi, good afternoon everybody.
Good day.
Yeah.
Hey, Marc just staying on the topic of.
The recovery in civil training.
And sort of I guess, the lead lag for you and how you're tethered to that.
On the on hand, it is clearly.
Not visible exactly when the recovery starts on the pace of recovery.
On the other hand, I've been pretty surprised at.
Just how many airlines are out there talking about especially domestic oriented airlines talking about.
Flying this summer.
90% of their 2019 capacity.
And you just mentioned being being more tethered to narrow body and wide body.
So I guess I'm, a little surprised you're not seeing that already.
Maybe you could just speak to that and I guess specifically.
What is the lead time for training pilots tethered to specific capacity that is coming back how can it be done in pretty short order is that why youre not seeing it yet.
Well I think that the.
On the level of activity that we're seeing is certainly not representing 90% flying right now.
But I think hopefully we will see that the summer and I fully expect that.
There's a lot of pent up demand that all of us want to get back on airplanes. All of those won't go let's face it in Montreal with minus 18, I wanted to ask about.
So I think it's look for us it's going to be.
One on board is going to open one of these quarantine rules going to be.
Lifted again on Montreal, we have an eight o'clock curfew so that basically it's.
For us it's just as I mentioned before is were highly correlated to the level of airplanes fly the level of flying activity. So yeah, a lot of airplanes flying is it good question, how many flights per day rate when that frequency starts.
It's increasing because theres more volume you're going to see obviously no more pilots we needed so you're going to see more trading activity more utilization of our training centers. So it was about 50% utilization of aircraft right now youll see about 50% average utilization in our commercial aviation.
Trading activity. So I think that's we're going to see a watch that metric were highly correlated to it.
That makes a ton of sense and again I recognize that.
Nowhere near.
90% of 2019 on on on much of anything right now but.
Again, if there are.
Bunch of U S domestic airlines or there's a decent amount of airlines talking about flying a surprising.
Capacity level surprisingly close to 2019 this summer.
Wouldn't you know how far in advance of doing that do they have to do the training or they are they able to do the training.
Pretty close to doing that I would've thought it would've been a few months in advance, but it depends if you're talking about pilots that are on staff that are maintaining your certifications then as long as they keep doing every.
Every six months from flowing back into a simulator maintaining stuff like they have to do a certain number of landings every 90 days those kind of things that they're easy to bring back on online.
Or are you really have the issue where it takes months is if a pilot falls out of certification that would typically fall.
You really haven't gone back to training after a year then you're out and you have to go back essentially the square that can take months.
What do you have any individual pilot, let's say flying a narrow bodies 737 or 80 20.
GAAP to go back to school go back toward type rating course, you, maybe a month out but of course the euro that's one month for one pilot, but then you have to have the available infrastructure and training number of simulators and training slots to be able to train any volume.
<unk>.
Of personnel back online I think maybe the other thing that if you're talking about.
<unk> for example.
We call day main carriers they have their own simulators, so that's where.
Where you don't see it translating in our training activity, but we see that.
On the ways in terms of the update activity that happens and for us talking to them and actually doing stuff about.
Supporting them with regards to overflow trading when they will need that delta training that those kind of discussions that we have.
With that I guess.
When I roll it all up given what you saw on the quarter and then and then you're discussing.
Next quarter being pretty stable it doesn't sound like I should be counting on much.
Much of a.
Jump in your revenue that leads the global system wide capacity and instead I should really just tethered to that is that the conclusion well.
Well, what I said I think is what I look at the utilization of our trains.
Centers ice Berg.
Very similar level.
In the quarter were in based on what I've seen in the third quarter. So that's what we're seeing and we have pretty good visibility on it because.
Obviously of where we sit in.
To date, we've got.
A month and some behind us more than a half behind us.
And we have a pretty good view of bookings in our in our debt we're training centers. So.
That's where I'm coming from.
Okay. That's helpful.
But again to me, it's like we're talking about weeks now with Doug It doesn't change the fundamental.
Fundamental thesis of see even going into the end of the year.
Yeah, No I don't think it.
I hear you there.
Right.
Probably just had the lead time confused.
But that's that's all helpful.
In the health care business.
Very significant at least percentage change.
Change in the quarterly revenue.
Seeing the new product announcements.
Can you help us out with what from this increase is long term sustainable versus you know only short term related to COVID-19 versus was literally adjusted this quarter.
Well the beat I would tell its not just this quarter, but it is it is related to the Canadian ventilator contract, which we said from the outset. This is stepping up.
Part of the war time effort to help.
Our fellow fellow citizens with beef being a developing from scratch.
<unk> of which we got the contract with Canadian Comers. So what Youre seeing there is a contribution in earnest of the ventilators and Thats about I would tell you about half of the order we the good news is debt.
But the fact is that with the corn.
The pandemic, where it's at and with less severity overall in terms of the use of valor theres not going to be as many needed. So I think we had a contract for about 10% while widen up for about 10000 will deliver above 8200, so about little over double what we delivered 4200.
57 net.
This past quarter will deliver a total of 80 to 100, so it's just a little bit less than 4000, so the contribution over the next.
Quarter couple of quarters, we'll probably be similar to in terms of from.
On that contract to what you've seen and you're talking about.
Teens kind of margins on that contribution be.
Beyond that it's also I think going back to your question. So the big increase is due to that one contract and that contract is coming on now having said that what I would tell you is that just demonstrates the capability that we have at <unk>. When you think about that we're able to literally from scratch design.
An engineer and deliver a highly technical.
The device like a ventilator tells you what we're able to do.
We transition we announced last week, we transitioned our work force share Montreal.
Fabrication of 50000.
Air Purifier units that are revolutionary in what they do so that will help us not only to basically if you like maintained 100 jobs on a production line, which is good because observed absorbed overhead and it has I wouldnt say a material contribution to the earnings, but certainly not dilutive by any measure.
And more importantly.
Yes, I think there is more legs potentially to that early days, but.
And from a larger standpoint.
I am I am very bullish on the future growth in health care very groups. If there is anything that this pandemic has demonstrated is.
Not only what we can do in health care, but the receptivity of customers to the kind of products and services in health care that sees brand can bring to bear.
Early days and on the deliberate leadership Heidi Wood <unk> net debt.
Net division in earnest and adding our digital capabilities.
Never been more bullish.
On the health care will becoming meaningful part of C. L.
Not in 10 years.
Okay. Thanks, so much.
Thank you.
Thank you.
Continuing on our next question comes from the line of cannot Gupta with Scotiabank. Please go ahead.
Thanks, and good afternoon, everyone.
So perhaps the first one on defense.
The order activity seems to be good like it's kind of holding up despite obviously all the pandemic related issues. So you spoke about.
But what's the wondering what's going on putting a pressure on revenue and margin compared to where this thing is on your backlog on that gets the 12% got on margin backlog, but we're not seeing those margins you get debt and revenue is kind of maybe cap because of those mutations but.
Any additional color you can provide on what's what's causing defence program execution here.
Well look I think.
First of all maybe say that my thesis hasn't changed at all that defense is a growing business and we were worried.
We're in a transition year I know for a number of reasons.
Although we have had some good order activity.
The fact is that and I'm very happy, but as I mentioned on the call during my conference call remarks share.
What kind of awards that we're winning to me our marquee contract they really demonstrate.
Yes.
Credentials in training across the World you just think about the KC 135 contract very major contract for the U S Air Force.
On a contracts that we have with special forces on.
Synthetic environment contracts that demonstrate the expertise and the technology that we can bring to bear that is really going to be critical going forward. So I think short term what we're seeing here is there is some of it and I think that's going to persist for a little while is the dirt from order activity because.
Like it or not the military support areas like procurement and engineering are just like everything else hit by Covid related absenteeism and disruption so that is affecting near term order activity.
Net orders go away, but in fact that they get protracted in terms of when they were actually going to be awarded because of the work required to be able to do that nearer term right now we are being affected by COVID-19.
I could give you a specific examples we have for example on our Tampa training facility, we have a major training facility, where we do see 138 training and the large the large part of training, we do that for foreign militaries and that tends to be good business.
Unfortunately, because of the border restrictions and travel restrictions the customers can't get to the training Center. That's just one example, again near term issues, but those.
The major color I would give you that's affecting our results in defense at the moment.
<unk>.
Is that that's what.
That's where all ended right now may on unless you want to expand the question no absolutely.
That makes sense clearly I think that's what I talked to the travel restrictions, but I was just curious if there's anything overly material incremental debt that kind of expense, but that's good on this.
Full flight simulators on the civil side.
So you talked about in the MD&A disclosure on a sound that'd be backlog is pretty strong.
Should support production for the next couple of years at least just curious as to you know that 35 deliveries you are planning for this fiscal year.
That's sustainable but the current backlog for the next two years or do you need to win more orders on the <unk> side due to produce 30 clients each year.
Well I don't think we've given a lot of guidance to that.
I think youre going on beyond to a level of guidance right now, but I would say look it doesn't.
Ill remain to what I said is that we will deliver that backlog over the next couple of years.
If we were to reach let's say we have a good read.
Net no order as well, which is not going to happen and we're already getting orders and we still and we have a lot of interest in our with customers as they ramp up taking.
Taking on airplanes, because deliveries are being restarted I think we will get orders. So the situation that you talked about really doesn't occur but.
Those those contracts that we have the backlog that we have there.
The real driving factor here is the data that we've committed to the airlines and those are firm and it pretty much not pretty much every one of those contracts that has been looked at in terms of.
In some cases the customers wanted to basically deferred the delivery because of the situation deferred deferment of the aircraft.
And everyone now has a new date, which is firm and that's what we're executing to that net and so the long answer short long answer but the delivery.
Of that backlog is preferred over next couple of years.
Okay. That's good just kind of expand expanding on that a little bit.
Because you talked about Max on later on the call.
That's true true acquisition and clearly they were kind of align with Boeing on that Max Motors wondering if your backlog for a Max M is here.
Where is that right now and what are your plans for our production on the back side. Please.
Well I can tell you that yes true fits in very very well with that at CAE. If I look on the situation on match today at CAE, We delivered 41, Max simulators to date and that includes five in our network.
We have sold 53.
Now I would say we sold 57 total, but we had we defer to on our network and we had we had to do.
Referrals from another airline so I would say debt 53 sold to date the true.
11 simulators delivered to date and they have 14 sold and that's the entirety of all day.
737, Max simulators, and we are continuing to support Boeing through our Max overflow training agreement then net.
With its exciting because its our first training cooperation with Boeing on quite excited about that net specifically on the Max.
That's great. That's a really good color Marc there and last one from me.
Last thing I would tell you is maybe just a little bit more color. This based on the number of aircrafts that are out there I certainly expect northward of $50 to 6700 37, Max simulators over the next five years minimum.
Okay, that's great Thanks, and last one for Sarnia.
Free cash flow wise, obviously Q3 was so good income so cash flow and working capital generally tends to contribute a locked in on the third quarter, but just wondering.
Looking at the historical on most usually working capital seasonality wise comes off in Q4 anything this time.
You think it's different.
The last few years in terms of seasonality and then obviously capex kind of picks up as well right. In Q4. This year. So any color on the free cash flow heading into Q4.
Yeah, absolutely. So I agree with you a solid Q3 performance with $224 million and really that's a reflection of improving operating performance flowing through on the cash from ops that you see quarter over quarter continued improvement there.
Obviously, if the operating performance and continued.
On cost and cash preservation measures and so on that we've put into place.
And just absolutely continued.
<unk> on each of these and it really kind of demonstrates the cash generative nature of the business.
We added to that the noncash working capital performance at to your question on seasonality.
We are seeing.
A similar pattern.
<unk> in <unk>.
In the first first half.
In a reversal and.
Partial reversal in the second half, we do expect that the states and an investment position for the year.
So it should follow the trends, so Q3 being one of the strongest.
Performance in our non cash working cap and where we saw that was really a nice step up on elections on our DSO and as you can imagine with the pandemic and all of that was going on there was.
I guess, an increase in the day sales outstanding and with all of the focus.
That's starting to come back down.
And also really good.
You and visibility and management on inventory and supply chain. So we.
We continue to focus on generating cash and minimizing their working capital, so and and it'll follow pretty much the seasonality that you've seen in the past in terms of Capex. We spent about a little less than $60 million to date, and we do expect a ramp up in.
In the fourth quarter in pace with the.
The plan that we have some of the spend that will do to support the restructuring program as we.
Moves some of the locations, but also investing in the opportunities that we have we still it still continued to see good opportunities to deploy accretive capex up and frankly, especially on the business aviation field, where.
Those organic investments.
Really kind of deliver significant incremental returns have you seen an entirely organic the deployments we've done it drives 20% to 30% incremental return on capital within two to three years. So as we see those opportunities in lockstep with the demand secure demand from the customers and then.
We're deploying the capital accordingly.
Thanks, I appreciate the time.
Operating cash we're.
We're running on locked in on time here I think we'll take two more last questions before we open up to members of the media.
Absolutely Sir.
Next question comes from the line of Kevin <unk> with National Bank Financial. Please go ahead.
Yes, thanks, good afternoon.
Kind of wanted to follow up on an earlier question just had.
With regards to the health care segment.
Obviously, CAE is known as our training and simulation company.
Net debt that you keep one this ventilator contract and you stepped up there.
It's obviously, a pretty nice win there but.
Just sort of wondering about this air purifier contract and that sounds more like a contract manufacturing type of deal I'm. Just wondering if there's like a shift in strategy here in health care, where it's kind of no longer solely focused on training and simulation and now Youre just kind of looking for other opportunities. So maybe you can just describe what sort of the go forward strategy is in the health care.
No Youre correct Cameron strategy Hasnt change that we're seeing we're very much focused on the opportunities that we have and there is quite a market there and it's a growing market with regards to what we can do in simulation and training. So if there is a change strategy over there is none now.
Have been I'd say this both contracts are part of the.
On the humanitarian effort that we've done to support again, our fellow global citizens on a fight against COVID-19, but it just demonstrates what we're able to do at CAE and I think that that's piece of itself, but that speaks for itself in all of our business. The systems engineering expertise that manufacturing expertise that we have the global sourcing opportunities.
Software and the integration of it all with the subject matter expertise that we have in areas such as health care, that's where it all comes together and I think that's applicable but again no no change in strategy in terms of health care.
Okay. That's great just wanted to clarify debt thanks very much.
Thank you.
And our next question comes from the line of Ben with planning with <unk> from Bank capital markets. Please go ahead.
Yeah, good afternoon, everyone.
Just to come back on Defence, Obviously, you talked about the 10 day make this contributed to delays in the execution, but as we go beyond the spend day, making this transition year.
Especially with the new president seem to use how should we be thinking about <unk> ability.
To rebound in terms of revenue growth and margin in fiscal 'twenty, two and beyond.
Yes, well I think it I think it should be it.
You should feel good about it as I said I certainly do.
As I mentioned repeat as you said, we are managing through a transition here and we're working through challenges, which are short term in there. They are real that brought about by the pandemic.
And but we have.
A growth strategy, it's been reinvigorated go through the.
The input that we have not only from Heidi wood, who read it.
In the interim debt in the beginning for about six months, and then Gelson who runs the business now.
Wealth of experience in the in the defense sector and the security sectors I'm very very bullish on what we can do here and what we're focusing more on the technological capabilities of <unk> and leveraging into specific.
Pacific high value areas like this.
What we've been talking about talking about the single synthetic environment. This is the ability as you know very well that we do very well.
Is to be able to.
It may make the world create a digital twin of the world and in which people can exercise and that becomes very very important.
And you heard me talked about before as the world as the nature of training changes because of the defense priorities are changing we are we've gone from if you look at the defense priorities. So the United States for example, strategic priorities.
Switch from what used to be we've talked for years about supporting that kind of threats that are those that we saw on what was called the war on terror now, but what people are focused on is training for fight a near peer point, which is important.
You cannot be assured that you have control of the.
Air control of the airwaves control of the space assets.
So.
You have to train obviously heaven forbid never have to deal for real that that happens, but what does the military do where they're not in conflict with a trained for conflict.
You, obviously can't train for fighting a near peer threats.
But so when we do is provide an artificial world a synthetic world the digital seamless digital twin of the world in which you can exercise where all of the domains come together the air assets to ground assets enable assets. This space assets the cyber environment those are the things.
Things that are going to be.
I actually becoming what is required to be able to support training and we have a leading edge capability and we are winning contracts in that area. Like for example, the one we're winning with silicon global situational awareness. So again as we always do a CE, we're an innovation powerhouse with kantar.
He knew what to invest in differentiating technologies. So you've heard us talk about see cracks. The E series visual system, all of which support the thesis I just mentioned again near peer challenges that affect our ability to raise margins now near term.
Basically issues with regards to BD to order activity, because COVID-19 related but it's a transition doesn't change anything.
By bullish stance with regards to the future defense.
Okay and on L care, Marc you've been quite successful with the events later in the air Sanitizer Fortunately Ts.
I would like to hear more about.
What what type of revenues are sustainable or what would you see as a permanent AR.
Resolved and also what kind of a fortunate Ts you all beside the these are sanitizer and Betsy later, because it might open the door for more fortunate. These force you down the road for health care.
Well I think the ventilator contract is coming to a net debt over the next couple of quarters, I think that'll be done well will.
Produce the rest of the 4000 odd units that we have remaining to go.
<unk> contracts. So I think look it's done it's not huge numbers because these things are maybe $5000 of beef. If you look on average so it's not big numbers, but it is important it is important.
Technology beyond those I think is very exciting and think it has potential even beyond COVID-19 into in terms of its capability to it.
Literally eliminate bacteria right up to black mold for example, but but again so we'll see we'll see if we can build.
Get more of those beyond that I would say as I was saying to camera our strategy hasn't changed we see.
Growth in health care significant growth in health care through <unk>.
Turning to our knitting, which is simulation based training and services.
In the health care sector and <unk>.
That's going to be fueled by our digital capabilities, which as you know as we all live digital is not as being incredibly accelerated but during this pandemic and that will continue and we have very very specific skills and capabilities. There that I think will propel not only health care, but the rest of our business.
And maybe I'll Joe Okay.
So we've been on just I'll just add that this is that our manufacturing contracts on we're not actually selling it directly to the client.
And ultimately from a CAE perspective, although really important it's not that significant from a financial perspective.
Yes, Okay. That's great color on maybe a very quick one for you saw on your.
<unk>.
When we look in terms of financial perspective, what would you like to see.
For reconsidering or revisiting your work dividend and buyback programs.
Yes, I think cash.
It's like we said the capital allocation priorities have not changed.
On the first priority remains to invest in accretive growth and as we've seen with <unk>.
Three acquisitions action in the quarter and we continue to see opportunities on the organic growth capital fund.
We balance that with maintaining a solid financial position. So on the current returns dividends and buybacks. It's always been a function of the level of excess free cash flow.
And the level of accretive investments, we see ahead of us. So it remains an ongoing dialogue with the CAE Board.
Okay. Thank you very much more defined.
Thanks.
Thank you.
Operator, that's all the time, we have for members of the investment community. We do want to take the last few few moments that we can to open up the lines to members of the media.
Most certainly we will now begin the question and answer session for the media. If you would like to register your question press. The one followed by the four <unk>.
Good day, Peter <unk> will always stream gives Joe Fitzgerald.
Sir It appears that currently there are no questions from the media sector.
I'll return the presentation to you once again.
Great. Thank you operator will then conclude this call for <unk> third quarter fiscal year 2021.
Thank all participants and remind them that a transcript of today's call can be found on <unk> website.
And good afternoon.
Thank you.
That does conclude the conference call for today, we thank you all for your participation and ask that you. Please disconnect your lines <unk> Matthew.
And just to double dose.
Wow.
Looking at a bunch of money have a great day everyone.
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