Q1 2022 CAE Inc Earnings Call
Okay.
Good day, ladies and gentlemen, and welcome to the CAE first quarter conference call. Please be advised that this call is being recorded I would now like to turn the meeting over to Mr. Andrew <unk>.
You May now proceed Mr <unk>.
Good afternoon, everyone and thank you for joining us today before we begin I would like to remind you that today's remarks, including management's outlook for fiscal year 'twenty, two and answers to questions contain forward looking statements. These forward looking statements represent our expectations as of today August 11.2021.
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.
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 and.
And our filings with the Canadian Securities administrators on SEDAR and the U S Securities and Exchange Commission on Edgar.
On the call with me this afternoon or lack thereof, <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 and the media, Let me now turn the call over to Marc.
Thank you Andrew and good afternoon to everyone joining us on the calls.
Our positive momentum continued into the new fiscal year and I'm pleased with our strong first quarter performance.
Even in the midst of upon them and we've been able to drive results by being adaptive and agile through some of the most rapidly changing circumstances.
We reported top and bottom line growth across all three business units during the quarter and.
And on a consolidated basis, we generated 37% year over year growth and 19th sense of adjusted earnings per share.
And civil.
First quarter average training center utilization was 56%, which is 1% higher than last quarter and much higher and the 33% and the first quarter last year.
We also delivered 11 full flight simulators to customers around the world.
Our new orders front, we signed training solutions contracts valued at $338 million.
Including five full flight simulator sales.
New four year business aviation training agreements with journey aviation and gamma radiation and a three year business aviation training agreement with Alcon jet.
We also succeeded to penetrate more share of the traditionally in short airline training market with two new 10, New 10 year exclusive aviation training agreements with Scandinavian Airlines Ics and Westjet.
We were also selected as a partner of choice to aircraft Oems and the <unk>.
<unk> merchant and advanced Air mobility market.
We're leading the design and development of the John aircraft systems integration lab for the company's new all electric vertical takeoff and landing or VTOL aircrafts and the journey aircrafts and just at the end of the quarter, we announced a strategic partnership with Ebola Copter and develop certified and deploy and any.
<unk> pilot training program and courseware development for EV total operations.
On the M&A front, we expanded our position and civil maintenance training with the acquisition of global jet services.
Moving leader and aviation maintenance training.
This tuck in acquisition expands our capabilities with increased addressable media business aircraft and helicopter platforms for maintenance training to World class regulatory approved training programs.
By leveraging our experience and pilot training, we expect this to enable rapid growth that he and the maintenance training market.
And defence, we booked orders for $162 million, including newly awarded contracts Nightcaps Army to provide a new and upgraded maritime integrated training systems.
And the so set consortium to design and develop the and.
Initial prototype Hh 60, W and virtual reality.
Reality mixed reality aircrew trainer for the United States Air Force.
Other notable contracts include continuing to pry provide upgrades and updates on C..130 day training systems for the U S Air Force as well as KC 130 day training systems from the U S Marine Corps.
Continuing as well continuing to break in a range of in service support solutions for the Royal Canadian Air Force, the Cfe key new aircrafts and continuing to provide management and support of Royal Australian Air Force Aerospace simulators.
Defence also received in order to provide a new podcast trainer a range of updates and additional train and support services for the PC 21, and ground based training system supporting pilot training for the French Air Force.
I'm, especially pleased with the speed at which the team concluded right. After the end of the quarter our acquisition of L. Three Harris and military training, having obtained all regulatory approvals and meeting all other closing conditions.
And we're excited to welcome some 1600 members of the <unk> Harris military training team and to leverage our combined expertise to support the mission of our defense and security customers.
Combined teams are now squarely focused on integration efforts and seizing on and on our expanded market opportunities.
As testimony to how our position is already substantially and minted buyouts rehearse military training.
And of the quarter Defence, one key positions on three major IDI cues and two noteworthy prime contracts that together and significantly expand <unk> customer base and market reach.
Typically we want is we want the largest ITI two contract and she's history.
With our price position on the U S General services administration, or GSA, Astro <unk> vehicle for net operations aircraft development and systems integration support and training course.
Gain access to four of the five pools because of the three <unk> Harris military training acquisition, which in total and represents a budget of several billions of dollars over a 10 year period.
We also won a prime contract on a multiple award task order contract or May taught IQ to provide mission support services and the United States Army juices come in.
Defence also want a position and an important growth domain as a key partner to small business on the national Cyber range complex <unk>.
Furthermore, defence, one a competitive prime contract with expected lifecycle value $90 million U S over eight years.
Simulators and training for the U S Air Force joint terminal attack controllers.
And in and in another first for CAE Defence, one to three letter agency prime contract with the GSA and expanding our market penetration and the synthetic environments enhanced multi domain operations support and training.
And health care and encouraged by the double digit year over year growth that we had in quarter, which is driven by our core health care simulation and training business. We continued to continue to bring highly innovative solutions to market with the release of <unk> three two and advanced software technology that makes our platform.
The industry's first ultrasound simulator and with three D. <unk> Altice ultrasonography and multi cleaner reconstruction for improved fidelity and realism, and we also launched CE ICC, new which is a digital portfolio learning solutions targeting critical care conditions for ultrasound and.
Casey.
With that I'll now turn the call over to Sonya Who'll provide you some details about our financial performance and I'll return at the end of the call to comment on our outlook Sonya. Thank you Marc and good afternoon, everyone.
Locks continue to reflect the success of the measures we've taken to strengthen the company both externally and in terms of expanding our reach and adapting to dynamic market conditions and internally and to lower our cost structure consolidated revenue of $752.7 million was 37% higher compared to the first quarter last year adjusted segment operating income.
<unk> was $98.4 million compared to a loss of $2.1 million last year quarterly adjusted net income was $55.6 million or 19 cents per share compared to negative and 11 cents and the first quarter last year.
Cash used in operating activities. This quarter was down 46% to $129.1 million compared to $88.4 million and the first quarter of fiscal 2020 one free cash.
Cash flow was negative $1, $47.6 million compared to $92.7 million last year, we usually see a higher investment and non cash working capital accounts and the first half of the fiscal year and.
And as in previous years, we expect a portion of the non cash working capital investment to reverse and the second half we continue to target, 100% conversion of net income to free cash flow per year.
Growth and maintenance capital expenditures totaled $73.9 million this quarter, mainly for growth and specifically to add capacity to our global training network to deliver on the long term exclusive training contracts and our backlog.
Our growth Capex is directly linked to our opportunities to invest incremental capital at attractive returns and free cash flows with several attractive market led expansion investment opportunity and he's on the horizon. We are in good position to deploy more organic capital and so we are raising our expectations for total capital expenditures to more than $250 million and.
Fiscal year, 2020 two.
Income taxes, this quarter were $10.3 million, representing an effective tax rate of 18% compared to 24 per cent for the first quarter last year income tax was impacted by restructuring cost this quarter, excluding which the rates would have been 19% on this basis the decrease and the tax rate was mainly attributable to is beneficial.
And impact of certain tax asset, partially offset by the change and the mix of income from various jurisdictions.
Net debt position at the end of the quarter was $1.6 billion for a net debt to capital ratio was 33, 9% and net debt to adjusted EBITDA was $2 four three times at the end of the quarter also between cash and available credit we have approximately $2.6 billion of available liquidity.
And the restructuring front, we continued to make very good progress. The program is enabling CAE to best serve the markets by optimizing our global asset base and footprint and adjusting our business to correspond with the expected level of demand and the structural efficiencies that will be engineering. We continue to expect significant annual would occur and cost savings to our ramp up of a run.
Rate of approximately $65 million to $70 million by the end of the current fiscal year.
Began executing our restructuring program and the second quarter last year and as at the end of June 2021, we had incurred a total of $136.2 million and restructuring expenses for the entire program, including $12.2 million and this quarter, we expect to incur total restructuring expenses related to this program of approximately $50 million and fiscal 2000.
And.
Now turning to our segmented performance and civil first quarter revenue was up 75% over Q1 last year to $432.9 million and adjusted segment operating income was up to 85.
Was up $85.9 million over the first quarter last year to $69.7 million from.
Margin of 16, 1%.
The civil book to sales ratio for the quarter was <unk> 70 times and for the Rolling 12 month period. It was <unk> eight times.
And defence fourth quarter revenue was $288.2 million was up 3% over Q1 last year and adjusted segment operating income was up 37% over last year to $23.7 million for a margin of eight 2%.
Fence the book to sales ratio for the quarter was five three times and seven times for the last 12 months and.
And in healthcare fourth quarter revenue was $31.6 million up 42 per cent from $22.3 million and Q1 last year.
Adjusted segment operating income was $5 million and quarter compared to a loss of $2.2 million and Q1 of last year.
With that I will ask Marc to discuss the way forward.
Yeah.
Our net.
As we looked at the period ahead, and I expect our positive momentum momentum to extend throughout the fiscal year and beyond 18.
18 months ago, we're just beginning to confront the most severe shocker company had ever faced and yet despite the many uncertainties at that time.
And we were resolute and our determination not to not only recover from the pandemic to emerge from it as an even stronger company.
We're still independently and and despite that reality, we've gotten stronger.
And I'm really encouraged by everything that we've done to reinforce <unk> base over the last year and.
Year, and a half actually to expand our horizons for long term sustainable growth the slope of a recovery to pre pandemic levels and beyond and continues to depend on the timing and rate at which border restrictions can be safely lifted and normal activities resume and our end markets and in new geographies, where we and our customers have significant.
He and operation, but not notwithstanding there really this spur at global vaccination rates and the volatility of border restrictions, which continues to obscure the usual market visibility.
We still expect strong growth and our core markets. This fiscal year coming mainly in the second half.
We draw confidence from several important moves that we've made to expand and solidify our leadership position.
Including pursuit of our growth our growth our growth opportunities pipeline that is so far netted five acquisitions and civil and consolidate our position and expand into growth adjacencies and our largest ever acquisition, namely L. Three Harris military training and defence, which doubles, our presence and a U S defense market and.
Accelerate our defence and security strategy.
At the same time as expanding she's reach externally.
We embarked on enterprise level projects to substantially lower our cost structure and achieve even greater levels of operational excellence you heard Sonya reiterate our expectations that were reached and exit rate. This fiscal year of 65 to 7 million $70 million for annual recurring cost savings from those initiatives.
Yes.
And civil work and an excellent position to benefit from a broader market recovery, which so far has been more narrowly led by domestic air travel specifically and in regions with relatively high vaccination rates and cargo operations.
The rebound and domestic operations and demonstrates the pent up demand for air travel and the potential for a rapid ramp up when the restrictions ease.
Cross border and transcontinental operations have continued to lag as they're much more tied to the easing of border restrictions, but.
But we believe considerable pent up demand exists there too.
At the same time as a broader market recovery looks to take hold and commercial aviation, we intend to continue expanding our market share and security, new and and securing new customer partnerships drawn from a large pipeline and mob airline plastics.
We're also succeeding to expand our civil addressable market by over $1 billion to over $6 billion by extending beyond pilot training solutions into the rapidly growing market for digitally enabled crew optimization services and aircraft maintenance training services.
In business aviation demand has rebounded and a very rapid pace with current flight activity in the U S now exceeding 2019 levels and approaching the prior levels and Europe.
And this bodes very well for pilot hiring and business aviation training demand and is highly important segment of our civil training market.
Much of the current demand is coming from first time consumers a private aviation and.
And we believe the market and structurally expanded as a result.
Civil full flight simulator sales.
Driven by new aircraft deliveries, which are.
New aircraft deliveries, which are saw any signs of improvement the total market for simulator products remained small at present, but we expect to remain are.
We maintained our leading share of available full flight simulator sales and we still expect to deliver upwards of 30 and fiscal year 2022, driven mainly from backlog.
We're also expecting to build on our initial successes and the emerging advanced air mobility market, which we see as a new potential secular driver for pilot training and she has expertise and modeling simulation.
Already with selections by Oems, including John Air Mobility, and Volvo Copter, we see an important leadership role Percy helping to shape. The training standard for an estimated 60000, new pilots by 2028 and support of this entirely new modality of Air Transportation.
And defence.
<unk> the rapid closing of an L Street Harris military training acquisition provides greater definition to the remainder of fiscal 2022 and beyond.
And our focus will be on a successful integration of this acquisition.
International opportunities are somewhat slower to materialize and the current environment, but we see this headwind is temporary and we have a strong pipeline with some $5.8 million of bids and proposals pending customer decisions.
From a balance standpoint, having now substantially augmented our presence in the defence segment and in the United States in particular, we expect defence the benefits from the great from the greater government budgetary stability that this provides.
She is defence business has become the world's leading platform agnostic global training and simulation and pure play and we're very excited about the increased potential that that brings to capture business around the world accelerated with the expanded capability and customer set that we now possess.
Our new client positions on major IDI cues and our contract to develop simulators and training for United States Air Force Joint terminal attack controllers are all perfect examples and what we mean by synergies and how else rehearsed military training and expands our core offerings across multi domain operations and brings.
Access to new customers and programs.
Our defense priorities are focused on the long term and.
Investing in our leading position as a training and mission support partner with leading edge capabilities in digital immersion.
We're also enhancing our position by laying the groundwork to strategic and team with major Oems on next generation platforms.
With our expertise and increase of live virtual and constructive training along with our newly expanded capabilities to address mission and operations support we.
We believe we will make significant inroads, it's for broader and to test market in the years ahead.
And lastly, and health care and I believe we have and the right team in place, including a reinvigorated front and to fully leverage the greater market appreciation of the benefits of health care simulation and training to improve safety and to help save lives and we're making deliberate moves to increase our addressable market and access.
And the larger pools or the largest pools of value and healthcare training like nursing and then the military here too we expect good momentum and I look forward to gaining substantial and such.
Sustainable scale with our innovative solutions to make healthcare safer.
In summary, he is poised to benefit from how the world is changing and the post COVID-19 environment and we adapted our growth strategy to seize on the opportunities presented by these new realities.
We've made several important moves over the last year and a half to expand and strengthen our position and the investment thesis for he is more compelling than ever.
We look forward strong growth and a year ahead, and superior and sustainable growth and strong free cash flows over the long term, but that I think you create attention and we're now ready to answer your questions.
Operator, we will now be pleased to take questions from analysts and institutional investors.
Thank you.
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One moment please for the first question.
And.
Our first question comes from Conor Gupta with Scotiabank. Please proceed.
Thanks, and good afternoon, everyone.
So maybe the first question on the order activity and the book to sales ratio was a bit lower and the first quarter for both civil and defence segments and didn't see any delays.
And are any cancellations that may have impacted the orders.
No specifically no no.
No real no cancellations for sure Conor continue.
Continued headwinds on timing of international orders and defence and exit out of the call.
And it's still there's still some COVID-19 impact there and things are not back to normal not only and civil but in defence overall because again.
Travel restrictions and basically just.
And it's just not being back to normal so we're seeing that internationally.
And that's affecting things, but if you look defence in particular.
Never been a fan and said this meant and before it to not look at.
Orders on the defense side on the auto.
On a quarterly basis I will look at a 12 run rate of 12 months run rate and.
And EBITDA on that basis, yet you would come to the conclusion is below one but I would.
And I would point to the recent orders that we've had and the and the really very very encouraging.
Awards on not only on orders, but I know you choose that we've gotten since the quarter specifically since we've done the new.
Completed the acquisition of LCA Harrisville their training.
It is.
You know of course that doesn't materialize into order and take it as kind of a license to play but the package of selected prime on those IDI cues and is a very strong indication because that gives you access to literally billions of dollars over the next few years. So I'm very encouraged by that so I'm not overly concerned.
And the sustained basis on the civil side.
I think what I'd point, a couple of things if you look at and we've made no secret that a simulator orders are going to be slow in the quarter. So we don't we didn't expect it to have a book to bill anywhere near one four on the product standpoint.
At this time.
And on sale, if I look at training itself training. If you were to take training itself are booked.
Book to Bill is hired and one and.
And.
And I think the important thing to note there as well as if you look at our business jet business. The book to Bill at the business, Yes, as a trend is largely transactional business. So the book to Bill is always around one.
So it kind of U and <unk>.
Just because of the way we brought that we book that business. So if we're above one substantially it means that we're quite a bit above one in the commercial aviation training business. So that's the way I would look at things if that gives you a bit more color.
And that's very helpful. Marc Thank you and you mentioned the three IV IQ contracts, so congrats on that and the two price contracts as well.
Just to clarify do they do these five contracts belong to the acquired <unk> business.
Is it for the existing business and defence.
While the Dell belong to us because we own.
<unk> military training business and it was bid.
By L. Three.
Harris link and.
And the link is now owned by US So theyre all contracts there our Rd iqs.
No I am sorry, just distribute.
I wanted to understand is it.
Related to the L. Three has asset that you acquired or is it outside without Applegate you well, yes part of it is like the IDI cues for example.
And those Ida chooses various pools and one of them is training. Okay. So there was five pools and will go towards the details of all the pools, but.
And <unk> Harris link bid on five of those pools and they.
And can actually had a net share was flat, but they were selected as prime and five out of the 10 pools cats.
We were.
And were selected on one of those key legacy like let's call. It legacy for a moment. We were selected and are one of the pools, which is training is prime contractors and so as a result of this and what we get from the acquisition is obviously, a prime position on those other pools, which directly come o'clock come out come about as a result.
Of the acquisition.
The other ordered I would point to is the 90 million dollar order for <unk>.
And the training system for the day that she was here for <unk> that comes from the link acquisition as well.
And that's great color, Thanks, and a lot truck from me before I turn it over maybe for Sarnia.
You raised the Capex guidance lightly and are you still expecting 100% free cash flow conversion should we interpret that as you're expecting higher net income official quiet expectations. This year or is it the better working capital performance that you were expecting.
So free cash flow was negative and a quarter and really driven by non cash and capital and really what we see there and the usual seasonality.
And.
And is usually a larger amount and it's kind of annual.
Annual payments and the first and and the first quarter and the first half.
And and also maybe a bit of volume.
And maybe if it and volume a shift from Q4 to Q1.
So really the variation here.
And we expect this to reverse and parts and the second half as we as we.
Done before because we keep that kind of continued laser focus on on net working capital metrics and optimizing that.
And really it's still guiding to the 100% net income to free cash flow conversion now.
Just kind of highlight that the free cash flow I thought we've defined it does not include just net growth capex. So the capex.
<unk> increased to over $250 million is not included in that free cash flow.
And if I may and on the Capex one of the reasons that we have raised our view on that is really I think a positive development.
And and to tag onto what Marc was saying we are seeing some some good orders on the training side on the commercial side of our lines.
No.
And request more capacity, so they're not only asking from our capacity, but some of these airlines that were working with.
And we're seeing some change behaviors, whereas they would have.
Purchased the stimulator.
And.
Prior to Covid, we're entering into long term training agreements and and that's one of the reasons that we've increased our view on the Capex and I'll remind you that the organic capex is really the most accretive capital and growth and investment.
Delivering 20% to 30% incremental returns and the first two to three years and the Best example of growth compound and that we have.
If I can clarify why why would you need to invest into incremental capacity than linear utilization levels are still below 60%, let's say.
Should you not have excess capacity and your training centers already and like where is the demand coming from.
Right.
And it goes I'll answer that one the corner it goes directly to the question of if.
Behaviors being exhibited by by Airlines likely 'twenty two.
The airlines are basically looking to.
Changed from a traditional and source kind of model to exempt to looking and outsourced model.
We can.
He got commenting on that that we have more conversation today extend too just to that.
The net result, so we announced like too.
And to our sourcing and this quarter, where we've got 210 year contracts with two separate airlines on those type of those type of deals. So what you see and airlines.
Vesting and dish and new capacity, mainly for new aircraft and rather than going through the model basically investing and the simulators theyre turning over and signing long term contracts with us So thats, what youre seeing here. So a lot of that incremental capex is exactly for that kind of.
So that kind of behavior and and you know as we were saying that and we said many times and we demonstrated investing and that type of Capex is the best example of growth compounds that we have because we weren't investing it unless we see the type of return accretion that basically we presented to the street.
Which is very quite nice. Thank you. So that's the kind of and.
That's what we're seeing and to your question.
Yeah.
We're still operating at say, 56% capacity well this once the Marc once the market is back to normal and we fully expect to return, let's say apples to apples on the same level, let's say the same level of capacity well, what we're talking to this capex and investing is incremental.
Net.
Yeah, and I'd, just add that the demand and blend together new.
Platforms are platforms, where we don't have excess capacity of course, if we have a stimulators that that are underutilized and that's part of the restructuring program, we moved them around to match up with demand and so these contracts are for a platform here that.
And our under under or already all utilize our new.
I appreciate the time thank you.
Our next question comes from Kevin Chiang with CIBC. Please proceed.
Thanks for taking my question, maybe just a.
Two for me.
It does seem like like like a strength.
And this pandemic, you've you've invested and some don't some of these adjacent services you talked about the maintenance training acquisition, you think you've been growing the crew management.
Just wondering how you think about new Jason service opportunities you can bolt on and just simple I guess over the medium to longer term other areas and so what I'll focus on that.
And you don't offer now.
And then are you seeing benefits from cross selling and I presume. That's the angle here, where Osama comes true for pilot training and maintenance training and to manage their crews as well as without carnival.
The best case scenario as you bring this all together.
Well, absolutely I mean, that's that's definitely a big part of it.
And Kevin is traditional basically.
Large and the traditional share of wallet, we we like to and all of our and all of our transactions with our customers and that's been our model. All along has always to try to make ourselves more relevant and more important to our partners and and you're bidding.
Training partner of choice, but moving into more of we call and mission operations and defense and civil it is capturing more of their needs around the pilots around this technician around their operations, so maintenance training as a national.
Natural one we've done it we have a very nice franchise of doing that and business aircraft and commercial aircraft and we basically embarked on that and interestingly a good way with Telesis for example, when we acquired that and we're expanding upon it here with this acquisition that we're doing and this bolt on in the United States.
And I feel very good about the growth of that market. The technician market is one that is poised to grow from the same reasons that the pilot the new.
Proprietors glad to grow it.
10 years.
On the net.
Average basis, well, it's a very tenured workforce, it's a regulated market in terms of especially in Europe, where you need technicians with.
Certification and so it's a natural market for us beyond that again that we're moving into a wash and software enabled solutions.
That was what we did with Merlot with Russia, Buster and RV groups and again, we're making ourselves more essential to our customers and they already outsource. These these are solutions are there. They are open to all sorts of solutions, because we're able to address hot and buttons that debt.
Basically are not core to them.
And maybe just to clarify.
And I guess.
Simple to cross sell some of these newly acquired services.
And your core customer base and <unk>.
When you think about the addressable market and now I think.
And I think probably this year, you talked about civil being a $6.1 billion addressable market now with a maintenance training.
Our capabilities and give a sense of how big that pie is.
And as today.
Well at the moment.
What it does it's 6 billion, it's about the market that we see including those those adjacencies.
Okay, Okay and then.
Second from me just turning to health care.
And your outlook and your press release, you highlighted the growing new shortage.
And your outlook.
I think it's a long term tailwind for health care and the services you provide.
I'm just wondering when you talk to health care customers are you seeing I guess, a similar realization like you've seen civil and defence whereby.
And they recognize that simulated training could help free up labor or was it something has to educate these customers on and so that.
And it might extend out into that might extend out the.
Is labor shortage issue in terms of.
Revenue recognition opportunities you have with CAE.
Well for sure and look at a macro level and I was saying in my comments, we definitely see the nursing and the nursing shortages that exist and is poised to to increase as a catalyst for a business that's got us business because.
If you could talk about you need and you need more nurses you need more courses for nurse nurses, you need even more slots and nursing schools, who do we sell our products and solutions to two nursing school and training hospitals and <unk>.
Kind of thing so just that's the first order a response to that beyond that it's the fact that you can.
By using simulation based training you can make them more effective and you can provide value to those schools, whereas by using their product they can to make themselves more relevant and.
And a lot of cases and for example, and United States is over there more profit operations. So if they can.
Have a nursing program that is steep in and modern technology using a medical mannequins and digital solutions that that is more appealing for example, students who are looking to get a degree in the and that pretty good markets. So all of that contributes to how we see.
And the market and healthcare, but that's just one of the components. It's a good one it's an important one but.
I think if I looked at all of the.
<unk> catalyst and.
And basically for a business. They are just coming out of the pandemic and health care. It is I mean, there's never been a time, where health care is more on everybody's mind and.
We are reinvigorating the whole organization.
Basically concentrating on our core business, which as you commented and nursing for example, but we see opportunities big opportunities for example, and the military and government or a per mil per paradigm and organizations like <unk> for example.
And the FEMA and the.
And United States for example, federal Emergency Management agency, where we can bring.
Simulation based training solutions to the fold.
And so.
We are ramping up and health care and on there.
And very confident of and nice growth growth profile that would be good for our business.
That's great color. Thank you very much for taking my questions.
Our next question comes from Tim James with TD Securities. Please proceed.
Thanks very much.
Marc I'm just wondering if you could talk for a minute about.
Type certification versus avid and issue versus recurrent training activity that youre seeing throughout the network and maybe just commenting on how each is fairing relative to see.
Fiscal 2020 is kind of a baseline and I'm just trying to understand how the relative strength of their rebounds had been.
I would say that well first of all type rating and basically our business and commercial aviation training is pretty much operating and lock step with the the flying activity.
And that's what comfort around that's the that's the first order catalyst. So when you think about the.
And the utilization.
And overall training centers.
I would say that business and our fab is doing pretty darn well because of the level of activity. There in the U S. We're doing very well the training centers and high levels of operations.
Rest of the rest of the world and commercial aviation not so much because of skilled border restrictions and very uneven levels of.
All vaccinations so Europe.
You could take.
Average 56%.
Significantly lowered and that Asia.
And would tell you, it's still quite a bit behind because of again that the the level a very low level of vaccination, so and the <unk>.
And the past few weeks, we've had closures of centers in Vietnam, and Kuala Lumpur, and Australia, even so there's still so the fact that and I.
That is perversely might say very positive because we were making were able to make the amount of return that we're making are 56% utilization and with those dynamics I feel pretty darn good as the rest of the world and it covers like the United States for Us, which will happen and that's not a question and having travelled internationally by self <unk>.
Lee and I know, if you have but the level of hoops that you got to go through to flying to and actually it's you really got to want to so when that when that starts getting reduced I think we will see a lot of pent up demand in terms of AB initial activity. It's very it's actually very strong we haven't really reduce the level of flying activity only.
The only areas, where we've had to reduce is for example in Australia because.
Strict Lockdowns force as suppose our schools backup now, but that's the kind of activity and in fact, what you see as airlines.
Or are anticipating.
New with pilot shortage and an increasing so we're seeing orders from major airlines, increasing their number of cadets and our flight schools.
Significant manner, so that that's a positive for sure and also that gives you a light products.
What I said.
Whenever and this is historical whenever there is a crisis.
Even though the products and products.
And later deliveries are tied highly to deliveries there's always a lag when you have a shock and of course. This mother of all shot Theres always a lag before airlines start to bite simulators in earnest and so we're seeing that that's why we we anticipated that we're not going to get back to the level of orders that we had.
Pre pandemic for some time, but we're starting to share recovery, we had five and a quarter, which.
Wouldn't call it a run rate, but I am encouraged by that and I am encouraged by the level of activity I think airlines are seeing it come back Airbus is increasing deliveries next year, we see the big four U S. Airlines recall 3500, 6000 flight attendants and saw United Airlines.
Orders 200, the Max's and 70 <unk> hundred 20 ones.
And yes, and again and of course again, you know TSA passenger throughput and USA.
And it's continued to reach high very high levels go back at 80% pre COVID-19. So it's all pretty positive signs, but I don't know if that gives you a good answer Tim.
And that's very helpful. Marc Thank you very.
Very helpful.
Just on the 737, Max I know.
Sure.
And when the issues were kind of working their way through I guess, we gotta go back more than a year ago now see was building some some simulators and Max simulators and anticipation of demand and maybe not based on contracts in hand.
How does the.
How do those those simulators and your <unk>.
If you're carrying any of those are and have all those max simulators more or less and spoken for and are we kind of back to a normal trend in terms of.
Of Max simulators that would be being produced and CAE facilities, yet, though we have nothing and we have no backlog with sensors and Max are all delivered and I anticipate good demand for 737 net.
Okay, Great and then and my last question and theirs.
Great color on sort of where.
Offense orders are coming from.
And I'm just wondering specifically as you know there was a very nice increase as you've talked about and the bid pipeline and gets over $1 billion relative to the end of fiscal 'twenty. One and this is on the defense side of course.
Are there any platforms or.
Trends youre seeing or areas, where that accounts for that big step up in the bid pipelines any.
Warfare types any any kind of markets you could point to or is it really across the board.
And it's across the board, but obviously the U S. As it is.
First mark and the World. So you expect that sort of high level, but having said that the contracts that we go after internationally are our large contracts.
Net.
Basically establish it.
Turnkey training centers for fighters that kind of thing.
A number of.
Countries that we're looking to do that.
And specifically some of those talks are going slow because of the pandemic, but let's first and where we're seeing some of that order activities a bit protect protracted but.
Your question is I mean is it is that order pipeline.
If you like.
Is it sensitive to one or two major bid I would tell you it's across the board.
Okay. Thank you very much.
Yeah.
Our next question comes from Friday, Schamel with BMO.
Please proceed.
And so you're talking fatty we can't hear you.
Alright.
And I was on mute and a positive.
And good afternoon.
Wondering on the Ics and Westjet.
Are there assets.
<unk> commitment on your part towards these outsourcing deals or.
Is it a.
Purely kind of service side.
And its asset amendments, but asset that we put in the asset and it's part of the increased capex that we're talking about and both on both of both airlines and so now it's basically the analyst day don't investments and later, but we get and these two cases 10 year exclusive contracts.
Two four training on those platforms. So those airlines.
That's essentially it.
Okay.
And my second question is.
And I view, if you look at good here.
Can you give us kind of an idea about kind of what is the contribution that you're expecting.
In terms of maybe and revenues or operating income.
From the acquisitions that you've made and also if you can give us an idea about how much contribution you expect to realize on a full year basis from that $65.70 million restructuring program.
Well I mean, I'll give I'll, let sonya touch and display specifically the biggest one obviously as it is elsewhere harriss.
Well, we're very very happy to have behaved so closes.
You don't have sort of giving us really I guess three pretty much three full quarters.
And what we said in the past, that's probably a $500 billion business. So we've got nine months of it so.
Quick mask that tells me, what we should be able to get but having said that you can well imagine that having kolzig early brings its own share of complexities and what's going through going through putting these two sets of numbers together the teams together and so we're solely focused on on the on integration right now.
And so the heavy lifting before it can be very definitive, but but I think thats, what we just and that's the one which has pushed the big the big dog and this week.
And would get and Sony and maybe you'll comment on the others.
Marc.
As Marc mentioned completely focused on the integration.
And we had said it would be immediately EBITDA accretive.
And will digit EPS accretive in the first full year of operations. So that's FY 'twenty, three and working up to a run rate of synergies that $35 million to $545 million.
And also in our in and net EPS accretion and the first full year after closing.
So I would go with those metrics.
On the restructuring program and study for full year.
Given as guidance from $65 million to $70 million of recurring structural savings and and we are building up to that run rate over this year. So this this quarter alone.
Kind of flow through about 15% of that annual target.
And that's already kind of.
I think good progress and we continue to.
And then from that progress as we optimize locations and continued relocation and the simulators. So so we will see that ramping up throughout the year and and a little bit more and the second half as well.
Okay and and.
Maybe follow up on this question is typically on the aviation side.
And now that you've kind of overlapped the hardest quarter of last year your run rate EBIT and that business is.
About $250 million over the last four quarters.
Based on what Youre seeing and both delivery.
Full flight simulator, then opportunities on the services side would you kind of.
Maybe.
And give us maybe and overall range up what do you think organic growth will look like.
Go on to the next nine months and.
Year.
So we didn't.
Financial guidance.
And the visibility is still quite uptake.
And on the I think the level.
Border restrictions and volatility on travel restrictions and Thats. The main driver to drive a lot of the recovery there and now so.
But what we've said is that we expect.
And our strong year over year, Chris and so on a recovery on the flow through of those cost savings.
We have thought about we and.
<unk> delivered about $20 million of Soi this quarter, and a 16% margin and that's at 56 per cent Utilizations and 11 deliveries and the quarter and and Marc went into some detail on kind of the volatility that we see across regions and so.
And that recovery ramps up and the.
And our cost savings ramp up well.
We'll see.
So I follow and I and the margins as well.
Yes per day to break it down at that a little bit. So as you think about just as you say, if you look and civil law.
To break it down.
And at stake.
Revenue and earnings from simulators, well and like we've said, we will with respect to deliver about 30 per backlog okay.
And it makes your mind up what that looks like and then you look at and we talked about our level of training activity and our flight training our S. T OS and I talked about that that's pretty even because youll see big swings about that because that's kind of a U.
You basically book your revenue as you are flying so and each huge swings, but I would tell you saw an increase.
And when you look at the rest business aviation training is doing very well because business aircraft training is is on a high and you were and our Q2 that seasonally the low quarter and so you would expect it to grow in Q3 to four and then then you have commercial commercial is the one that is the wildcard because that's the one and it was saying.
That is really exposed to.
And the variability and then and the vaccination rates and and border section and so that's the one that caused the most headache and predictability U S doing great.
And really good so Europe is still low but it.
We're seeing signs the signs of promise, there and Asia, well I think it's tied to the vaccination rates. So I guess, that's the best.
Best Crystal ball I can give you.
Okay great.
I'd say, yes, and Westjet go into effect.
And now basically.
Well no we up to what the agreements are signed guidance and we're going to build the simulators to deploy.
Okay. Okay. Thank you.
Our next question comes from Cameron Derksen with National Bank Financial Please proceed.
Yes, thanks, very much and good afternoon. Just one question from me I'm. Just wondering if you can expand a little bit more on the latest R&D program that you've announced and I know you've kind of highlighted the advanced air mobility, and AI and some other things in there, but just wonder if you can provide any more specifics and and just wondering.
And what kind of new capabilities are you looking to develop at CAE that that maybe you didn't have before or maybe that you were underrepresented in before.
And a lot of it has to do with your furthering the core competencies that we have and then some of the new areas specifically like her.
Development of capabilities, among urban air vehicles, and we talked about electric hybrid aircraft and Green technology, that's another one or the other.
Others are continuing the path we were on.
Everything digital and our business.
Developed technologies allow us to be more important to a customer day, but and yet data enabled revenue streams from that and and a lot of it has to do with furthering our expertise around the experts and the world in creating these synthetic environments that are so important.
Two.
Warfare specifically.
And Thats, what I talked about specifically one of the.
The great outcomes coming out of the acquisition.
And.
And <unk> Harris is we are now we now have capabilities strong kpis and all five domains and because the military has now focused on.
Basically preparing.
For a near peer fight because again what is the military do when they're not in operations, while they trained for operations and trained for war. So what they train for a train for what they called and near peer fight and the near beer fight is one that you can only really do virtually and that in order to be able to do that you have do you have to create an environment.
Which is a synthetic environment in which the military can exercise and we are world class at that and but again nothing stands still and life and with basically continue to invest in R&D to make sure that we continue to hold up the whole and those skills that makes us the best and the world and more and more relevant to our.
Those are some of the things that I was talking about.
Okay. That's helpful. Thanks very much.
Our next question comes from Ben What party with digital Bank capital markets. Please proceed.
Yes, good morning, good afternoon, everyone.
During the quarter, we've seen some big aircraft orders could go and initial steps could lead to day lead to some sizeable training a fortunate fees.
Well for sure for sure and then what.
And as I said before to the extent that they are.
Going to translate into an incremental deliveries and it and that you see as I was mentioning Airbus increasing your production rates.
And that's going to inevitably result, and more simulators in the needed and the market and we fully expect to.
And to maintain our market lead specifically, we've got and Eden.
Moore and lead in that market with the acquisitions of true. So I think that will be good for us as well and training market as well and they're going to need incremental capacity what are that get deployed in terms of simulators or basically.
And the outsource training.
Okay and.
Now with respect to your increased Capex guidance. This year could you maybe provide some color on all of it will flow to our return on capital employed matrix overtime and whether that day.
The ramp up and.
Good accretive contribution is over a few years.
Absolutely and so as we've talked and and great. Examples and that these are all market land.
Contracts secured opportunities.
And so that means the ramp up.
And now there's some commercial and of course as we've talked about and from the contract that we signed but also have a good amount of.
Investment and business jet side, and the place and store network in line with that strong demand.
And that that market, that's recovering nicely so.
The growth Capex and organic growth capex at the most accretive capital that we deploy.
And and generally and we've seen historically and and and.
And what we see ahead.
Have a high incremental return on capital often within the first couple of years here and the 20% to 30% return on capital and so this is very much in line with those metrics and those expectations.
Thank you.
Thank you Andrew.
There are no further questions at this time.
Operator, if there are and then further questions what do people need suppress.
Sure.
As a reminder to register a question. Please press star one four on your telephone.
Okay.
We do have a question from Noah <unk> with Goldman Sachs. Please proceed.
And.
Hi, Thanks for that because I missed the one for construction and the first time.
Good afternoon everybody.
Thanks, Noah we got your email.
Yeah.
Awesome.
I had understood your prior comments to suggest that with a quarter under your belt here.
Civil a little firmer biz jet and lot firmer or the <unk> deal closed that you would maybe be providing more formal guidance and outlook commentary this quarter and I'm just curious.
Did I interpret that incorrectly or did the delta variant or the end market keep you from doing that and when do you think you might have enough visibility to provide a more formula.
I think you are right now and that's what we said we lost when we were there last last quarter at the same time I fully expect it to be able to provide more specifics to that that'd be that to what level of specifics and to be honest more and now one and now but I don't know how much more but look.
The reality is that.
I think we're not getting a loan and they said to me, we still don't have enough visibility.
And the recovery and vaccination and.
And basically result, and.
A reduction and travel restrictions and out of that market and and even even Europe is a bit challenging to predict right now so I M.
No enough to be able to predict that it's going to be we're going to see strong growth and especially specifically in the back half.
And in a seasonally low quarter now for flying activity. This year is no. If I talk about commercial aviation that's no different than any other year somewhat affected by COVID-19, but.
And the traditional patterns that we see where airlines and the summer of flying and the Western Hemisphere, and Theyre not training, we see some of that so but that's going to recover in Q3 Q4, but to provide any.
Guidance, that's going to be to me that I can really hang my head on that its need is going to be over the top of underwhelming I need more specifics we tend to be.
And that's I think we've always been that way a bit conservative with regards to providing any outlook on that basis.
Has the has the actual business not evolved quite how you thought it would in terms of utilization rate or order flow or customer activity or is this really you know that COVID-19 has progressed and a way that just hasnt become.
Incrementally visible as you thought it might.
I think the ladder the ladder strength, yes, it's basically that the business is going the way I would have anticipated.
Okay.
<unk> is doing is superb and fab business aircraft is doing better, but specifically the United States.
Right. Okay. Okay. That's a good clarification and Marc you've mentioned a few times, how youre in the seasonally light quarter for civil and.
And we can see that and the model going back over time, and that's usually the case thought always cash, but it's usually the case.
And you're expecting that to be the case of share because you're you have the normal seasonality, but then you just have to work.
And you're off the very low base.
And it has created and so are you expecting that to be the case.
No definitely that's going to be the case I can tell you. That's the case right now and business aircraft, even though we have a lot of we have a lot of training going on it's not as much training as we could and and.
And the reason for that is because the level of flying activity is higher than it was prior to COVID-19.
So when pilots are flying and they're not training.
And it takes you got it.
I'm and I'm, a business aircraft pilot and myself and I can tell you. It takes time, you really have a plan to be able to day.
And to manage your schedule and book of <unk>.
A week to go and do training, which is what you have to do so we see those dynamics and we expect to see it again.
We see it again this year.
Somewhat skewed by and as mentioned by Covid.
But the seasonal patterns still is there.
And as part of the reason why we're basically giving more of the growth towards the back half.
Got it.
By the way as well I would I would comment that we see is we're going to see the seasonal seasonal variability with the virtual deliveries as well because same as last year or every year, we have shut down and our factory. This year, we really we shut it down and for extended periods because of Covid related issue.
And so that means youre not building simulators. So we talk about 30 simulators for the year youre going to be a worst steward to the back half, even though they're coming from backlog.
It makes sense and I'm, just going to sneak in one more.
And I'm, a little surprised by the rate of change and civil.
EBIT dollars compared to revenue dollars sequentially, just given biz jet is stronger and that's higher margin and then typically with the utilization rate.
Or are we seeing with utilization rate being kind of flattish sequentially, but that's the phenomenon of the JV that you have that flow through EBIT differently than the and revenue dollars. So can you.
So a way to help me square up the variance there.
And then suddenly and whatnot.
Yeah, well on the margin front, its really a question and a mix Q4 and a very strong.
Contribution of proportion and so that that was the highest margin kind of.
And some volatility in the market and I discussed.
Great.
Ladies and terms of in terms of the top and the bottom line, so both top and bottom line growth.
And on both sides and several variables here and he saw growth from utilization and also on the cost side.
And our growth our profitability growth coming from from the cost savings and a lot of the restructuring program. It's across the board on the company, but a large proportion goes to goes.
And those two are.
And the civil side, but you also saw was that the deliveries were lower quarter over quarter, right, Saracen and where you had some and progress on those fronts, you had a bit of a lower deliveries in Q1 versus Q4.
Okay, Okay I'll leave it there thanks so much.
Great operator, I want to thank everyone.
Everyone from the financial community for participating and for their questions and with the time remaining wells and the Lions.
And members of the media should there be any additional questions from orders of the media ever and it's taken us.
Okay.
As a reminder to register a question. Please press star one four on your telephone.
Okay, well, if there are no questions and our remaining.
We'll conclude the call and again, thank everyone for joining us today.
And script of today's call can be found later this afternoon on today's on Cae's website. Thank you.
And that does conclude the conference call for today, we thank you for your participation and ask that you. Please disconnect. Your line have a great day everyone.
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Uh huh.
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