Q4 2021 CAE Inc Earnings Call
Couple of 6 corporate citizenship and a source of great pride for all of Us at sea.
In summary, a year and 2 months after the pandemic began the investment thesis for CAE is more compelling than ever.
And I strongly believe that we'll achieve new heights and growth and profitability and years ahead, as we bring to fruition and our recent acquisitions, our new digital product and our expansion investments are bolstered leadership and our operational efficiencies.
And with that thank you for your attention we are now ready to answer your questions.
Thank you Marc operator, we'll now open the lines and members of the financial community.
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The first question comes from <unk> <unk> of BMO. Please go ahead.
Okay. Thank you good afternoon, everyone.
A couple of questions.
Okay, a couple of questions first on.
The capex.
Indicating more than doubling and 600 million.
Can you kind of give us a framework gives us something based on what you have and the pipeline. If you can narrow down that kind of guidance, a little bit and it's something like $200 million to $250 million and more.
More importantly, where are you seeing these opportunities to deploy more capital.
Looking at your utilization rate, which is more of a consolidated number and it looks like Oh.
And while our room to grow and through but I'm, just curious where do these opportunities to grow.
And are showing up.
But if youll mind, some of that I'm going to be a bit free.
Specs because of competitive reasons.
But I think broadly.
Where we feel confident and that Capex number is because we're seeing the opportunities.
And that we've had and what conversations customers both 1 on.
And on commercial and business aircraft, where we can deploy asset simulators.
Other too.
And.
And I feel like I talked about overflow agreements on commercial aircraft. So you might not have seen a complete outsourcing, but you've seen a lot. What we've seen though is with secured debt as I said in the remarks, a number of agreements with airlines that we have if we do.
Deployed that capital and we can and we can basically get over 4 agreements that can be converted to a long term training contracts.
Especially on narrow body aircraft at the same time and business aviation, we see quite yet.
At attractive opportunity and the number of locations to deploy.
Business aviation assets and and of course both of those.
Generate some of the best returns and this growth capex debt.
He is 20%, 30% incremental return on capital employed at or after a very short amount of time. So we'll invest those every day invest and those every day every week.
And then everyone and Thats something that I would just add so.
And the review and are continually and the view of our capacity.
And we absolutely redeploy assets if.
First and foremost before issuing new and new capex, but opportunities like Marc mentioned they vary by platform spices. The overall utilization metric thats, probably not the best and so where we see demand and our pipeline and secured like Marc said and drives nicely accretive returns 23% range within the first few years and appointment.
So essentially that leads us to the guidance, which essentially will set at about <unk> more than doubled this years capex.
Okay.
My second question is on the.
The restructuring and the cost saving associated with it.
How much of the savings have you realized in 'twenty 1.
And just curious.
If you have.
A weighted for us to think about how little savings play out into 2010, and you are saying by the end of the year to be exit rate would be 65 to 70 million of cost savings. So what what would you expect the contribution for the year overall on gross profit.
Yes, so as we said it's going to ramp up during the year, we started to see some some savings, but I think it's really going to start kicking in and in FY 'twenty, 2 and ramping up to like you said around 65% and 1.
And $1 million by the end of the year. So this will be.
More.
And it into the second half and we're really kind of progressing quite well.
As I mentioned in my remarks, we're essentially completed and in the UK going from 5 5 training centers to 3 and Closeouts and centers and so on so that savings that will kick in.
As of now and so on some elements and Europe still underway and South America, but essentially what.
And what we'll see is a ramp up quarter to quarter with a heavier.
<unk> in second half as we kind of finalize some of these and reaching about $65 million to $70 million by the end of the year.
Okay. Thank you.
Thank you.
The next question comes from <unk> Gupta of Scotia Capital. Please go ahead.
Good afternoon, and thanks for taking my question.
So maybe the first 1 on civil I wanted to ask you about the revenue and Soi excluding government support was softer than what you saw in Q3.
Despite the utilization rate and simulator deliveries increasing sequentially I guess joint venture accounting, obviously create some noise here, but can you share any color on ex slide declined sequentially, including perhaps any impact off asset relocation as you restructure or any kind of revenue and mix on some other tourists pricing as well as product services mix.
Thank you.
I can start off I think.
Revenue is never a perfect metric and the civil business or actually and all of our business, but certainly in a quarter, but I think youre seeing what youre seeing part of it and.
In terms of the sequential revenue story.
And it's a nuance and our business debt nearly 50%.
Our business there are accounted as JV, which doesn't show up on revenue. So the majority of the JV that we have happened to be outside of the Americas and that's what we've seen in this quarter relative to previously is where we've seen.
The biggest sequential pickup and trends.
So again youre not seeing net revenue pickup, you're seeing and and soi, but youre not seeing and so thats 1 subtlety there.
At the same time is.
So you talked about all of the moves that we're making in terms of achieving your restructuring benefits and a lot of that involves removing simulators around and we're taking advantage of the period that we're in we're obviously training is.
Trading is at lower levels of debt.
It would be and a steady state. So we're taking that opportunity to move those simulators around because youre not going to see any revenue from those at the same time.
And frankly, and it was mix as well there is mixed and it always is but there is mixed and this quarter, but I want to add anything to it.
Yes, so to speak to the utilization climbed from 50% to 55% and we saw some improvement and the Americas, but.
A lot of the progression was in certain regions, where we do have more joint ventures, but like the middle East.
So what that did is contributed to the soi growth and just to.
Just to kind of correct or clarify there was sequential soi growth of 7% quarter over quarter and Thats why we usually indicate and this is the best metric on the civil side, because it captures everything so that increase and joint ventures translated and any and quarterly pickup and Hawaii and Thats also a <unk>.
And the elements.
And that's driving the margin improvement on the revenue side like Mike mentioned a bit of disturbance because we do have we did take the opportunity and the advantage to relocate several a lot of these simulators.
Stimulators, so that we can finalize and certain regions like the U K and so on and and progressed on the savings.
And so that's the start of the revenue per admit but ultimately we saw.
The contribution flow through on Soi with that sequential increase to 66 million from $62 million and on the margin.
That joint venture was was.
And was a bit of a driver because it has the soi without the revenue and also on the product side. The we.
Did have a good margin mix on the deliveries that we had in the quarter.
Thank you Robyn I was actually referring to the Soi decline, excluding the government support programs, but I guess as you pointed out before on the call. There is also kind of costs associated with the COVID-19 virus. So that's quite an income yes, yes.
Frank Connor just.
I guess, it's a new element and it's on.
Necessarily new we have been disclosing the government support programs since the beginning of the fiscal year. The update this quarter that we've added new non-GAAP measures to kind of reflect the impact I guess I'd give it more and more visibility and to incorporate some new reporting guidance as and somewhat but.
But what we look at is the adjusted Soi because this metric so it shows the contribution benefit but doesn't show the adjusted.
The adjustments to the heightened operating costs that we've incurred which is essentially neutralizing all the government programs. So so we should look at it on the adjusted Soi basis and on that basis, it grew quarter over quarter.
Let me just pile onto that.
Because I noticed the confusion there.
I think it's a very important quarter debt when we look at the when you look at the profitability of the.
Civil business with all the noise that is there a number that we use to manage the business is at 17, 2% adjusted <unk> margin and Thats up.
Youll versus <unk>, it was 50% and Q3 and that's really what we're looking at the manage the business and going forward, there's going to be a less of this noise because sucess won't be there. So I think I mean, you can use that as the benchmark to measure our progress going forward.
Okay that makes perfect sense. Thank you for clarifying.
And my second question is on free cash.
Cash flow. So I think the commentary you made and the.
Disclosures are also free cash flow conversion.
Continues to be 100% almost on net income this year.
And our conversion was obviously significantly higher last year, because the capex was down.
But how should we think about.
Free cash flow generation and the ability.
This year compared to pre pandemic levels and.
And can comment on the Capex.
These questions.
How much should we expect for growth capex versus maintenance Capex and your guidance.
Yes for the total Capex I think we'll stick to the guidance that we provided debt overall and it'll.
And more than double this year, and total and and I think you can use past trends to kind of split out that and maintenance and Capex I think I think those will hold true and in terms of free cash flow I think.
And in this very some ultra here, we really demonstrated how cash generative.
Businesses, even at very.
Low levels of activity and so on.
Ultimately, we've always targeted in the past, 100% conversion of free cash flow and and we'll do so again for FY 'twenty 2.
Upon my question and thank you.
And thank you.
The next question comes from Noah <unk> of Goldman Sachs. Please go ahead.
Hi, good afternoon, everyone.
Hi.
Just to make sure I have the new <unk>.
Additional disclosure around the margins correct.
Marc would you would you expect the civil.
Segment margin and the $17. 2 you were just referring to would you expect to see.
Continued sequential improvement from here from that level, even as the.
Government support programs rollout.
I think on necessity wide level definitely we would expect continued growth and that number just because we're going through and we're going to be throwing more revenue as quasi fixed assets and the only thing I'll say there is you've got to watch.
Where did <unk> kind of market and you obviously because of.
And of COVID-19.
But typically what you would see the summer months as you see.
And where airlines are flying more than our training is mostly seasonal effects that would probably be less pronounced this year, but on a run rate basis definitely as your volume increases and the next few quarters yoga and Estee Soi pickup.
From the volume of activity for the restructuring activities that we put forward.
And there's no doubt about that yes.
And on a financial basis with government programs and the heightened operating expenses essentially neutralized.
And so minimal financial impact non and net basis for the year and so the adjusted Soi is really the basis on which where we're providing the guidance and so on and so ultimately what this program allowed us to do is keep employees onto the worst of the pandemic and where volume of activity has returned and we have the employees to operate.
And and serve our customers and where it hasnt, we've made the required reduction and.
And so the growth the growth or the guidance that we're giving is on these adjusted.
Adjusted net.
And the.
The margin can fluctuate based on mix that's the growth.
Alright, so im wondering what youre, saying is.
Not just that you have the government programs and then you also have just other cost and disruption.
And then we should adjust for 1 but not the other what youre, saying is there is cost and the system that you otherwise would have been able to manage.
Youre just not managing because you have the government support and so we should think of those as neutralizing.
Correct.
Okay.
Could you elaborate on.
What you saw in the utilization rate within civil Bye.
Large commercial aerospace versus business jet and.
And maybe a little bit more about geography.
Yes.
Business aircraft doing pretty good as I said.
And the U S in terms of flying activity.
Pretty much back to COVID-19 levels, which is quite a hunting, which is is really yes.
Prior to going back to 2019. So you can expect that thats debt, resulting some pretty good trading activity and our in our civil training center, it's a bit slower in Europe, because of all that and continuing.
Lockdowns and in Europe, mainly people less less ability to fly.
Even that is recovered faster than you see in commercial aviation is far in commercial aviation.
And just Florida and United States.
If I go around and commercial aviation.
We're a worldwide business.
So your question I think is apropos.
Because really the big pickup for us will be when the big pickup occurs.
Around the world, but what we're seeing regionally is like in the United States for our commercial aircraft were actually starting to see realization match pre pandemic levels, we're actually adding capacity and we're hiring structures to support what training, but a lot of airlines and our flight school classes are now looking to resume and it really full force.
And this summer and with the voluntary furloughs that occurred over the past year and the United States.
The airlines are seeing a higher need for future pilots as they really need to eventually replace everyone. That's left and they can all our call recall back.
We're seeing we talked about this training bubble before.
We're starting to see that but it's it depends on which geography, you're in and countries and countries, where we saw a sudden.
And operations and training, we're seeing a spray and the spikes and our training center utilization as the airlines rush to get their pious Kernigan. Good example that was.
Recently, and Columbia, where we really where.
And we're working really hard and I can tell you we are above 100% and our training center to support specifically Avianca and decided to get all of our pilots current again.
And obviously it depends on the timing, but we're going to see this happen.
To me and across multiple locations, where there was pretty drastic lockdowns.
Look at.
And again going regionally CD, India, our utilization and notwithstanding the drastic situations and you see which is horrific in terms of.
The desk coming from COVID-19 to utilization and February was over 80%, 90% just as the domestic marketing was making recovery, obviously that slowed down.
And for good reason, but.
And if I could go around the world, but youre really.
If you were to basically look at where the remaining and Lockdowns are where you have travel restrictions and then basically you're seeing a subdued level of trading activity and where youre not like in the United States you are seeing.
And Youre seeing people return to travel.
You are quite heartily and I'm very encouraged by that and I think that is.
And that will show up.
And our numbers over the next few quarters and no doubt about that.
So Marc if you were it sounds like if you were able to disaggregate that 55.
And and training related to.
Domestic U S or something a region and type of flying like that strong utilization.
The utilization rate for you is pretty much back to pre pandemic and it's just that the utilization rate and domestic places that still have a lockdown or related to cross border.
Below the 55.
Pretty much pretty much because again the other factor to look at is that really what's picked up is narrow body domestic travel and again and thats whats picked up and United States. So this statement. You said you just said I would agree with what is still pretty slow is wide body.
Oceanic because again of the restrictions and I think that will be slower, but I think the statement you made is correct.
Okay. Thank you.
Thank you.
The next question comes from Tim James of TD Securities. Please go ahead.
Hi, Thanks, Good afternoon, and thank you for taking my call.
Just my first question.
Marc do you kind of touched on earlier and your commentary about some.
And some of the kind of opportunities for.
The commercial airlines that may be looking to outsource training and and that's always been kind of a and opportunities we're seeing and I'm. Just wondering if you can kind of update us on.
And now as we kind of come out of the pandemic any kind of areas, where you see more regional opportunities or.
Maybe just the way customers are thinking about this and if the pandemic has influenced their thinking and it's really going to kind of accelerate some of that outsource and just any any additional color.
I think I've seen the same thing that I've talked about previously before theres much more conversations we're still at a state where the.
And the majority of world barring and like I said, perhaps the United States are still.
Really dealing with.
Severe restrictions and they look at the situation in Canada, I don't need to describe that to you because we live here, but the fact that the fact is airlines.
Large part of the World are still re really trying to figure out what their fleet mix is going to be so.
If you don't know what your fleet mix is going to be versus narrow number of narrow bodies versus wide body and kind of routes that youll be flying is pretty difficult to really decide on what you can outsource the older Dodges and.
We used this example, and before we don't outsource a mess and.
And because either 1 or 2 things are going to happen either either you're going to pay too much or us and CE.
We're not going to make a good deal because we don't have a good basis on which to base a outsourcing agreement, but I think the <unk>.
Comfort by the factors I mentioned debt.
Perversely COVID-19 has been a great time to start and airline for a number of reasons as I don't need to highlight so.
And we secured contracts with 6 startup airlines that are going straight to basically to the position and of course, we project has to say.
Why would you started training operation when we can provide a turnkey solution for you. So for 6 of the Star Airlines have what we're doing and at the same time we've deployed.
Training.
In our various centers and in customer centers with similar with long term overflow contracts, whereas before and Thats really airlines, saying, hey, I'm not going to invest necessarily.
But I'm going to sign a contract with you.
And because I really don't know what I want the flex it I don't know what the demand is necessary going to be but I need to maintain that optionality. So they could see the upside and the market and thats attractive because that's always that always has to generate the genesis for outsourcing.
Because our business model and I think you've followed us for a long time, you've seen it is always and true to our relationship whether it be a simulator whether it would be.
Running their training centers.
Doing some training overflow and more and more expanding our relationship expanding our wallet share with customers and I felt very good about that and.
And again lots of conversations but.
And the patient man, but I'm quite confident that that patience will pay off.
Okay. That's helpful. Thank you and then just my second question I'm thinking about kind of the upcoming fiscal year and some of the acquisitions well.
And I guess in particular, 1 or 2 acquisitions that you've made and the sales space and the new simulators that you've got and the network is there is there a need to or will you be continuing to kind of relocate and move stimulators around this year and let me correct in thinking it is.
Kind of a good time to be doing that because utilization is still relatively low, whereas if you were sort of running flat out and it would be a bit more disruptive or are you kind of at the point now where you feel pretty good with the location.
Seems drove and network now.
We've been doing that.
The big part or a big part of our restructuring program is exactly that Tim and as I've mentioned, we've done and we've done a lot of that and the fourth quarter and we're going to do some more but I think that's going to come down and.
That's we're really going to see a lot of other restructuring savings come from.
Because we're taking advantage of exactly the fact that there is reduced level of activity to be able to do those moves. So you don't have to do it and a steady state.
Absolutely right.
Great. Thank you.
Thank you.
The next question comes from Kevin Duerksen of National Bank Financial. Please go ahead.
Thanks. Good afternoon, just really 1 question for me and it's I guess around the.
Foreign exchange.
And the fact that we've seen the Canadian dollar strengthen fair bit here and the last few months.
I guess and the patches have been kind of a net negative from a I guess a revenue growth perspective, but just Tony maybe you can sort of remind us of the <unk>.
FX impact on CAE.
And whether thats changed from where it was a couple of years ago.
And also if you have any sort of sensitivity around FX changes and what that means to either a operating income or 2 to EPS.
Yes, so youre right.
It is a bit of a headwind largely as a result of the translation.
And so.
And obviously and it really depends on where the revenues are earned and so on so the sensitivity evolves, but ultimately what I view that as a relative rule of thumb is 1 on the USD CAD. The whole year is about $2 5 million, that's why I'm back.
Okay, So $2 5 million.
Okay, Okay, how much operating.
Yeah.
And translation so and.
Training centers, especially I guess, the the revenue and the costs will generally be aligned.
That's right.
So margins would be would be similar but the translation would come into a lower Canadian dollar equivalents.
Got it.
And that's all I had thanks very much.
Thank you.
The next question comes from Kevin Chiang of CIBC. Please go ahead.
Thanks for taking my question and maybe just a clarification question Marc you talked about what you're seeing from <unk>.
And our utilization perspective by market and a lot of it is being driven by I guess the level of openness.
Both respective economies, but but wondering.
And some countries look at how quickly demand has.
Improved or air traffic demand has improved and in short order and looking at the you also I think we're seeing a pretty strong rebound here.
Are you seeing airlines and Marc.
A little more lockdown.
And potentially accelerating their training efforts to maybe prevent any bottlenecks.
If they think that theyre, all domestic air traffic trends could experience a similar.
Serge.
And as I've seen in the past few months here or are they waiting for more clarity before making that type of training decision.
It depends it depends I think it was highlighting.
Highlighting and the question from Noah is exactly where CFC NAV like for example, and South America.
It was using the example that <unk> really really decided to get all other pilots train. So we had a bubble there where we are operating at north of a 100% and their training center in Columbia and.
So that's an example here right now if you look at some other countries of Chili's and full lockdown.
Brazil, no surprise still battling very high cases, so we're going to see so necessary to flying activity. There, we're seeing airlines hunkering down.
But that will come back and now.
And when that comes back I would fully expect that we're going to see similar kind of story that we saw in the Columbia Asia Pacific.
Many countries.
And just read the newspapers right and many countries have pulled back on opening up the green channels that they had due to what's happening in India.
Malaysia declared a national and.
Nationwide Lockdown again, so if you look at our utilization numbers overall.
And well imagine that.
A key partner to Air Asia, which is of the southwest Airlines, if you like the South East Asia, and so you can well imagine that debt, Malaysia is locked down and where not to do and too much there.
And I talked about India, what's happening, we have been high and India, that's coming back down.
Not surprisingly.
I don't think I think it's pretty mixed situation over there and Europe, we've seen.
And basically it's a day by day situation and it was.
Encourage and see some opening up of recently that we're that they're telegraphing that theyre allow us tourist travel in and within Europe, right now and so thats very positive.
And we see.
And I could go around that can go on and on that Yossi Portugal's, possibly lifting as early as may 17th but until it tailor those lifts happen.
It'll be it'll be slow and I think airlines have been cautious in terms of their trading activity. But then you go to other areas like for example, and Japan with Japan Airlines has never missed a beat there that training centers are operating at very high levels, because they've taken the tack that theyre going to take.
Take basically the opportunity throat is to maintain their pilots fully trained and <unk>.
Overall, I think if you look at our business Agg and aggregate I think what we've said before is look at the EBITDA growth.
Not getting ahead of the IATA.
<unk> path that's predicted.
But having said that.
I'm very encouraged by the level of flying activity at ICD, United States and I think that will be reflected I don't think anybody is going to take flying for granted anymore.
And all that.
Fair commentary and great color and then maybe just.
Hi.
A clarification point.
And health care the CAE.
<unk> ventilator, you you've completed the deliveries.
And the fiscal fourth quarter.
Is there a reason why you can't.
And all that.
The other governments or are there other.
Hospitals.
Is there a reason why this is.
This is.
Kind of a non recurring revenue stream or is that something you've been actively.
No.
Total interest here.
I think what Youre seeing there is our discipline, we remain focused and what we're good at and what you saw specifically with the example and ventilator.
And what Youre seeing is what CAE can do and as I always pointed that way you take the debt.
Fantastic subject matter expertise that we have and health care.
We understand everything to do with.
The training for incubation and everything to do with the use of ventilators. So we were able to see sees that subject matter expertise and considering a crisis. They existed at the time for the civilian and marry that up with our core competencies that CAE of systems engineering and software global sourcing that we have.
And I put that altogether, and producing and an absolute record of time, not only and produce them at high range, but.
Inventum because there was no there was no ventilators available and there was obviously no parts available. So we up from scratch. So you saw and example of what we can do so with regard to your question about moving forward, we took a conscious decision.
And just say that while we look at the market going forward, yes, we could do that and maybe we can get in Brazil, but I think with the with the the what's happened and the pandemic a lot of people now produce a lot of ventilators, including.
Typical producers of ventilators across the across the World Oems and Bruce Van letters and there is at the moment I think theres a glut overall I mean, obviously there are some shortages in key areas. Like for example, you tragically in India for example, but what Youre seeing is overall theres going to be a lot more ventilators on a steady state and its <unk>.
We are required and going forward.
Do we really want to be competing against the established players producing <unk> and we think and we've selected note and we have what we'd rather do though is to again using our subject matter expertise to partner with those companies and producing simulation based training associated with that and.
And then really that we think is a much better way for.
I appreciate the color there and kudos on opening up the documentation center and Quebec.