Q2 2022 CAE Inc Earnings Call
[music].
Yeah.
Good day, ladies and gentlemen, welcome to the CAE second quarter Conference call.
Please be advised that the call is being recorded.
I'd now like to turn the meeting over to Andrew aren't of it.
May now proceed.
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 Facebook can answers to questions contain forward looking statements. These forward looking statements represent our expectations as of today November 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 in 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 are Marc Paul <unk>, President and Chief Executive Officer.
Sonya Branco, our Chief Financial Officer.
After remarks from Marc and Sonya, we will take questions from financial analysts and institutional investors.
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 Mark.
Thank you Andrew and good afternoon to everyone joining us on the call.
Let me just start by.
We're mining reminding all of us at today's November 11th.
They all veterans day in the United States remembered stay in Canada.
So.
Let me just start by saying Thank you for all veterans for their service.
Yeah, Ron This November at 11th we honor members of the military both past and present that first of all conflicts.
Those who made the ultimate sacrifice for our freedom.
And those who serve our countries to date.
I can tell you that see we're privileged to work with everyday with many veterans we have over 2000 and are poised CAE and I can tell you I'm.
I'm honored to work and being a company of heroes.
They bring a unique point of view and skill set to our company at a price that allows us to achieve new heights.
Now onto the quarter.
In an environment, where we continue to experience an uneven recovery in our various markets and geographies, where we operate.
She delivered year over year growth in the second quarter.
On a consolidated basis, we drove 16% year over year revenue growth and 17 cents, while adjusted earnings per share.
These results came mainly from the strengthening of our civil training business. The continued progress of our structural cost savings program and the integration of L. Three Harris military training into our defense results. We also build continued momentum with $870 million.
$171 million in orders for positive book to sales ratio of one point or seven times and at $8 8 billion.
The backlog is.
Civil second quarter average training center utilization was 53% up from 49% last year, and 3% lower than last quarter, reflecting usual seasonality, but also the varying global realities with respect to the COVID-19 Delta variant.
And the measures taken to contain its spread for example in the Americas with the benefit of high vaccination rates and easing travel restrictions, we saw near pre pandemic demand. During this period in both commercial and business aviation training.
While at the same time Asia Pacific took a step back and remained at low levels as countries are clean in Malaysia, Thailand, and Vietnam renewed lockdowns.
On the orders front.
We signed civil training solutions contracts valued at $409 million or a $1. One three times book to sales ratio, including nine full flight simulator sales and a five year air aircraft maintenance training partnership with Air Canada, a three year exclusive agreement with Brussels Airlines, a five year agreement with <unk>.
Envoy Air a four year agreement with PGA Portugalia and finally, a five year agreement with Alaska Airlines.
We also announced new partnerships and relationships, including a strategic partnership with better technologies to design and develop a best in class pilot and maintenance technician programs for the Alio E VTOL aircrafts.
As well as our relationship with Starr insurance companies for a first of its kind program that combines a rigorous training regimen and insurance for single pilot jet owners.
Additionally, Intertek <unk> Aviation group has become a large partner foresees innovative suite of digital services specific to the business aviation market.
On the expansion front, we deploy a Boeing 737, Max full flight simulator in Europe at our Amsterdam Training Center, and we announced a new flight training location in Las Vegas, Nevada in order to meet higher demand.
Expand our business aviation footprint, which is expected to open next summer in Las Vegas.
It depends.
Cause the acquisition acquisition of L. Three Harris military training on July 2nd.
And it delivered solid revenue with double digit margins in the quarter in line with what we expected.
I had the pleasure to visit our new employees and facilities in Texas and Colorado in August to inaugurate the closing and I can tell you I'm highly impressed by the technologies, we've acquired and the potential for even greater differentiation of our defense training and mission support solutions.
I'm also extremely pleased by the great cultural fit with CA, we live and breathe simulation and training and support of our customers' most critical measures the energy and excitement of our combined teams that they have for the future is really powerful palpable and since the acquisition we've retained.
And I think this is a fantastic fee. All 67 members of the senior leadership team, which is a very strong statement in of itself, but the strength of our shared vision and your mutual passion for what we do.
The organic defense business was negatively impacted this quarter by delays in orders and program execution, particularly international which has been largely due to the pandemic.
But notwithstanding those headwinds we booked defence orders for $428 million in the quarter, representing a book to sales ratio of 1.02 times.
Those orders, including included our recently announced first ever Prime contract award from the U S intelligence community with the beyond <unk> prototype for the National Geospatial Intelligence Agency.
We will be integrating our capabilities across digital technologies Big data architectures machine learning and artificial intelligence, making this a prime example of CAE at the forefront of modeling and simulation expertise permission and operational support across the multi domain environment.
Other notable defense orders during the quarter.
A range of contracts for support services, similar upgrades and modifications and support of customers, including the U S Army Navy Air Force and Air National Guard and internationally for the German our force.
In healthcare, we also experienced COVID-19 related headwinds during the quarter, particularly in Florida, where our business is based in light of the added challenges I continue to be very encouraged by their dedication the achievements of our team to deliver double digit year over year top line growth in the quarter, excluding the ventilator contract from <unk>.
Last year.
Notably this marks the third quarter of year over year revenue growth for healthcare as it ramps up ramps up and expanded and reorder Red energized organization.
With that I'll now turn the call over to Sonya, who will provide additional details about our financial performance I'll return at the call. It the other call to comment on our outlook Sonya.
Thank you Mark and good afternoon, everyone.
We delivered year over year growth during the second quarter and our results continue to reflect the success of the measures that we've taken to strengthen the company both externally in terms of expanding our reach and adapting to dynamic market conditions and internally by lowering our cost structure.
Consolidated revenues of $814 9 million or 16% higher compared to the second quarter last year. Adjusted segment operating income was $90 7 million compared to $79 $3 million last year.
The adjusted net income was $53 $2 million or <unk> 17 per share compared to 13 cents in the second quarter last year cash.
Cash provided by operating activities. This quarter was down 32% to $30 9 million compared to $45 $6 million in the second quarter of fiscal 2021 pre.
Free cash flow was $19 $4 million compared to $44 $9 million last year. The decrease was mainly due to cash provided by operating it.
The cash cost for restructuring integration and acquisition costs, this quarter, which amounted to approximately $52 million.
We usually see a higher investment in noncash working capital accounts in the first half of the fiscal year as in previous years, we expect a portion of that non cash working capital investment to reverse in the second half also we continue to target a 100% conversion of net income into free cash flow for the year.
Growth and maintenance capital expenditures totaled $46 7 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 in our backlog.
Our growth Capex is directly linked to our opportunities to invest incremental capital with attractive returns and free cash flow with several attractive market led expansion investments on the horizon. We continue to expect total capital expenditures to be more than $250 million for fiscal year 2022.
Income tax recovery this quarter amounted to $13 million, which normalized in structuring integration and acquisition cost represents a range of negative 1% compared to an effective tax rate of 14% for the second quarter of last year on this basis. The decrease in the tax rate was due to impact of changes in tax laws on tax alpha.
The positive impact of audits and the mix of income from various jurisdictions.
Our net debt position at the end of the quarter was $2 $48 billion for a net debt to capital ratio of 38, 2% and net debt to adjusted EBITDA was $3 five five times at the end of the quarter all told between cash and available credit we have approximately $2 $2 billion with available liquidity.
The net debt this quarter was mainly attributed to the closing of the L. Three Harris military training acquisition and the execution of the related financing package. We see this increase rolling through to interest expense should continue at about the $35 million quarterly run rate going forward.
Now turning to our segmented performance and several second quarter revenue was stable compared to Q2 last year at $362 1 million and adjusted segment operating income was up $13 $4 million over the second quarter last year to $65 3 million for a margin of 18%. This was the result of higher.
Training utilization in the Americas, offset by lower product revenues with the delivery of only five simulators this quarter compared with 10 last year and 11 last quarter. The lowest stimulator deliveries under this quarter was on plan and we continue to expect deliberate to deliver north of 30 simulators for the year.
Ability to drive an 18% margin on just 53%.
Training utilization shows the benefits of the higher mix, some training and the solid progress, we're making to wrap up our recurring cost savings initiatives.
In defence second quarter revenue of $417 $9 million was up 38% over Q2 last year. This includes a $135 $1 million from the integration of the Altra Harriss military training in our financials.
Adjusted segment operating income was $26 $7 million, including $16 $2 million from the acquisition for a margin of six 4%.
On an organic basis, our defense business decreased this quarter most simply in terms of adjusted segment operating income and as Mark pointed out. This was mainly driven by delays in product related orders and program interruptions and delays, particularly internationally as COVID-19 impacts persistence in several regions underlying the quarterly defense book that.
Sales ratio of one point or two time, where international orders, which continues to lag at <unk> 75 times book to sales and orders from the U S, which were higher at 1.15 times.
We closed the acquisition early and synergies realized in the quarter were nominal we are progressing well with integration efforts are on track for the $35 million to $45 million of total cost synergies by the end of your two following a closing of the transaction.
And in healthcare second quarter revenue was $34 9 million.
Up 17%, excluding the ventilator contract last year.
Adjusted segment operating loss was $1 3 million in the quarter compared to an income of $3 $2 million in Q2 of last year segment operating income reflects the growth in SG&A expenses in preparation for higher revenue growth and the impacts of the quarter related to the severe COVID-19 conditions in Florida, which affected supply chain unlimited the team's ability to execute on order.
With that I will ask Marc to discuss the way forward.
Thanks Tanya.
As we looked at a period ahead, we're confident that we'll emerge from the pandemic are larger more resilient and more profitable CAE than ever before.
Profit out of that.
Until then.
We must manage in an environment with this spread rates of recovery in our markets and the geographies, where we operate something that will likely continue to be a factor for several more quarters until a more uniformed global recovery takes hold.
We have additional reason for optimism with the reopening of the U S border. This week to vaccinated international travelers and the latest news about the potential anti virals to mitigate the effects of COVID-19.
Ultimately the <unk>.
Hope of a recovery to pre pandemic levels and beyond rests on the timing and rate at which border restrictions a quarantine measures around the world can safely be lifted.
We certainly haven't been standing still waiting for the recovery to happen.
And we've been focused on the things that we can control specifically, we'd be getting stronger by playing offense in a downturn and I'm very encouraged by everything that we've done to reinforce <unk> base over the last year and a half to expand our horizons for long term sustainable growth.
The pursuit of an expanded growth opportunities pipeline has so far netted see nine accretive acquisitions, including the most recent announcement of our agreement to acquire Sabre Air Centre Airlines operations portfolio.
Highly valuable suite of flight and crew management and optimization software solutions designed to enable airlines to operate their businesses with efficiency and precision.
And we've continued to secure highly attractive opportunities to deploy organic growth capital.
Including our recent expansion of business aviation training in Las Vegas, Nevada, and at the same time as expanding <unk> reach externally, we substantially we're substantially lowering our cost structure and achieving even greater levels of operational excellence.
We're on track to reach a run rate of 65 to 70 $70 million of annual recurring cost savings by the start of the next fiscal year in April 2022.
Civil a greater desire by airlines towards trucks E, which are critical training and digital operational support and crew management needs higher expected pilot demand and strong strong growth in business jet travel are enduring positive underpinning a secular growth market.
There is considerable pent up demand for commercial passenger air travel and once at least drives higher flight activity and training demand. We're seeing this chain of events manifest itself already eating Americas, where we're experiencing a near total recovery and train utilization and it's.
Strengthening pipeline of full flight simulator order activity.
We believe that this provides a blueprint for what a good broader global recovery in air travel should look like.
Since the end of the quarter. The market has improved with average training center utilization trending upwards of 60% globally again with the highest utilization rates currently in the Americas combined with still relatively depressed levels in Asia and the middle East.
In business Aviation, we're seeing we're seeing strong demand for training across the network propelled by flying activity in the United States and Europe that is now well above 2019 levels.
The uneven nature of the global recovery is likely to persist for a while but we're ultimately in an excellent position to benefit from the multiyear cyclical market recovery that is currently underway.
For the current fiscal year, we expect continued strong growth in civil weighted more heavily to the second half.
In defence the paradigm shift from asymmetric to near peer threats and a recognition of a sharply increased need for digital immersion based synthetic solutions and national defense or tailwind that favorite cheese business.
Given the increasingly.
Increasing relevancy of training assimilation or defense unit is also on a multiyear path to become a larger and more profitable business.
We're currently focused on the successful integration of L. Three harrisons military training business and expect to fully realize the $35 million to $45 million of cost synergies that we laid out by fiscal year 2024.
Defense is now more closely aligned with our defense customers utmost priority and is established as the world's leading platform agnostic global training and simulation defense pure play business.
This is expected to bring increased potential to capture business around the world accelerated we expanded capability and customer set that we now possess.
The pandemic has been international opportunities, Florida materialized in the current environment, but this headwind is temporary and we.
Have a strong pipeline with some six $5 billion of bids and proposals pending customer decisions.
We continue to expect to deliver strong annual growth for fiscal year 2022 with sequentially quarterly sequential quarterly improvements in revenue and adjusted segment operating income expected in the second half.
Supporting our view is our expectation for a reacceleration in order intake, especially from bids involving international programs.
They make related disruptions ease and with that we also expect the defence book to sales ratio for the fiscal year to exceed one for the first time in the last four years.
Other drivers in the second half and beyond include higher levels of execution on programs, specifically those involving higher margin products.
As well as the progressive realization of synergies as we integrate L. Three Harris military trend.
And lastly, our outlook for health care as continued quarterly year over year growth as we wrap up our expanded and re energized organization.
Long term, we believe health care is on track to become a sustainably material and profitable business and for the current fiscal year, we project double digit growth compared to last year, excluding the ventilator contracts.
In summary.
While there's no doubt the COVID-19 related impacts continue to affect all of our business units, we increasingly see a clear path to recovery and a larger more resilient and more profitable see in the future.
Specifically, we're currently targeting to reach a consolidated consolidated adjusted segment operating margin of approximately 17% by the time our markets are generally recovery.
With steady room for further improvement after.
We expect to reach this level of profitability on a significantly larger base of business with a post pandemic capital structure that will allow us to sustain ample flexibility.
Further invest in our future.
We continue to play offense during this period of disruption.
As evidenced by our nine accretive acquisitions and continued growth capital deployment since the pandemic began.
As business conditions continue to improve further we look to extend this posture as it relates to both organic and inorganic growth investments.
Our opportunity set continues to look very attractive.
And personally I've never been as excited about <unk> future as I am today.
With that I. Thank you for your attention and we're now ready to take your questions. Thank you Marc operator, I'd ask that you. Please open the lines to members of the financial community.
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Our first question is from <unk> <unk> from BMO. Please go ahead.
Thank you and good afternoon, everyone.
My first question.
My first question on the on the.
Kind of a legacy defense business.
It seems like we've been in this.
Seven 8% EBIT margin for the past several quarters.
This quarter, we dropped to three 7% I know you offered up some some explanations towards what's going on there I'm not sure. If you can maybe elaborate a little bit give us a couple of examples of what's really kind of happening in that business and.
What do you expect in the second half of this year do we see we've stepped back to where we were.
In past quarters. This morning.
Gradual recovery that you should expect from this.
Uh huh.
I guess organic.
Business.
Well, Thanks, Patti look.
As I said in our remarks today, we're continuing to expect stomped strong year over growth and this year. So clearly we're going to have to have a good a pretty good second half and that's and that's and then talk for defense as a whole, but which is obviously combining.
The quickest integration built very hard and this is the story with the legacy business or shall I call. It because I hate using that term, but I believe we used for the moment are organic.
<unk> business is one of continued COVID-19 related to shop for bolt on order intake and impact.
Impacting our execution.
I can tell you that there is at least five international orders I fully expect that I'm going to lie to you I fully expect it to come in this quarter, but did not happen and.
Because.
Delta for example, and ability to access customers in at least in the far east.
Five at least internationally.
Other factors I could I could point to you like for example in Florida was one of it during the summer with one of the hardest hits, if not the hardest hit as well as the Texas, which is another big state for CAE in terms of the Covid effects in the the variance attacking that so clearly that had an effect.
And.
Just a testimony that I said before Florida training Center, we trained international customers, let's see what 30 H you can.
Well imagine theres no customers come in and I, but the situation is changing you know borders opening international travelers come back the Covid situation is.
Much better not only across United States, but in Florida, specifically, so those are the kinds of things that we can see near term, which gives us more confidence in the outlook and when you look at the business as a whole for defense I'm talking about organic plus the integration, we're starting with which we're going to be starting rolling out all the benefits of our synergies.
You see you got me.
Most of that was started port like for example reductions in force that happens.
Post the end of a quarter. So for all these reasons you know it it's really is COVID-19 related impacts that we've seen that really drove that because our book to bill for the last few quarters as you know in the Oregon Defense business has been below one and eventually.
You run out of backlog that you can execute in an efficient manner and that's really the situation that we're seeing here, but again those orders coming we've been selected on those orders so I.
I would've I've always expected a back half and defense to be the strong order.
So and that's what I said last quarter I mean, what we've lost because of Covid. It we bought some that I would've liked to have gotten into in the second quarter no doubt, but it doesn't change my view of the full year.
Okay, maybe I can just about Honeywell had so yeah. If I just just a quick recap and laying it out.
The way, we see it on the organic business was delivering as you you mentioned Patty.
And the 78% range that's it in the twenties on this Hawaii and then so as Mark explained.
Explained as if he knows those delayed orders ramped back up as we advance the programs that we do have in backlog that had been disturbed by COVID-19, either interrupted or fully a fully stopped so suddenly in the middle east So as those ramp back up as the pandemic related disruptions ease then you layer on.
The contribution on the acquisition as well as starting to wrap up the synergies you know that'll take us to the 13th and 14th in the upcoming quarters.
Okay. Okay.
So.
That comment series 40, if youre talking about X y or in dollar terms, but yes.
Okay.
Okay.
Okay. Okay.
That's helpful. The other question I wanted to ask is on.
The leverage yes.
M&A and the opportunities you're seeing you're up to 355.
Let me go up a little bit towards the Sabre acquisition closing in a couple of quarters.
Hum.
How comfortable are you with the type of leverage given the pipeline of maybe opportunities you would see at this point.
Is M&A in the backburner now until you kind of get this profitability level back to Delever the balance sheet or how are you kind of.
Thinking about this leverage level.
Given the pipeline of acquisition and the opportunity to go through.
Well I'll start out with I'm very comfortable so the quarter closed at 38% net debt to cap 355 times net debt to adjusted EBITDA with all the financing related to the LTE Harris military training acquisition and.
And with respect to closing of the Air Centre operations are probably in in our Q4 will be using our existing liquidity, which will drive up our.
Our net debt to cap higher probably a little above the 40 or 40%, but we are expecting quick deleveraging in the next six to year with the highly cash generative business.
Organic business and the cash flow accretive net of this new acquisition now you'll you'll you'll remember all of the previous capital raises that we did in FY 'twenty, one and that was exactly to provide the flexibility to support the organic and inorganic growth opportunities that we saw so you know we've seen some great opportunities come out of all of this reception of.
Disruption and it allows us to seize on them, creating long term value and strengthening the company that become bigger and more profitable we have tended to have a pipeline, but as you've seen where patients with disciplined well wait for the right opportunities at the right value as we've done with Air Center, Oh, sorry Harrison.
When somebody of training, so very comfortable and ultimately it goes back to our capital allocation priorities are balanced accretive growth organic inorganic with a solid financial position.
Okay I appreciate the feedback the 17% target can you offer up what's the mix behind this like how much is defense representing <unk>.
How much of aviation representing just for me. Thanks.
I think that you know, we're providing that guidance on a consolidated basis really to underpin.
The messaging that all of these internal external measures as it relates to drive a larger business a more profitable business. So what we're guiding it is that once we do hit that recovery level that not only will we exceed.
Exceed pre pandemic measure, but on a much larger scale base of business I think maybe I would add I mean, there's no doubt that what.
That's going to be made of new highs in civil margins for sure. Some of that is a lot of that would leverage as you said plus the acquisition that we made and as well you know double digit margins in defense, that's what's kind of comprise that mix.
Okay.
Thank you. Our next question is from the line of Qunar Gupta from Scotiabank. Please go ahead.
Thanks, and good afternoon, everyone.
Uh huh.
Good afternoon. So I have a few questions just on defense and civil perhaps maybe needs to be to defend some out.
I think if I.
Look back.
But when you apply a L T harrahs.
I think it was.
$100 million of U S. I think to have a new business.
Also annually.
And what you did in the second quarter, obviously was below that run rate. So I'm kind of wondering if there was some sort of a transition of the impact in Q2.
We will see probably more contribution from us going forward is as you integrate them.
And then with LTE Harris together with the.
The defense organic business, assuming it gets kind of rebounds to the eight 9% margin level. So in the synergy.
It's 11, 12% kind of range.
The acceptable margin profile for the defense business for you guys. Thanks.
Yeah, we missed some of it but just the last part of your question is to say, it's sitting in a corner.
Yeah, I was wondering I think on the margin profile there.
<unk> organic business goes back to eight 9% margin and then as we had a plus synergies obviously they are double digit margins right now.
The overall defense business seems like it's going towards 12% EBIT margin with all of those.
Oh, yes, no look rather than before 11, 12%.
It was a good is a good number to plug it in longer term for sure I mean, that's where we're headed.
No doubt about that.
Yeah.
Right now the first part of the question about the.
Is there any ability to ramp up here given the build there a run rate before you acquired them.
Well, it's early days with L. Three areas, but I'm quite comfortable with what I'm seeing that.
We're going to deliver.
Right.
Three Harris, David the old legacy <unk> business and the synergies that we're together that we're going to generate.
Would you be achieving the margins that we talked about when we acquired the business and and I definitely see that I'm quite happy with what we've seen in the first quarter and more of that's coming.
Alright, thanks for that and then on the civil side. So you touched upon the utilization levels that clearly America are doing better Asia Pacific are lagging.
Where are you in Europe, what are you seeing there and then as we head into the seasonally stronger second half.
Both commercial and business aviation.
This should utilization levels.
To 260% plus you think or we are kind of stuck in the fifties right now.
Well look I mean, you read what I read in.
In terms of the Covid Covid recovery look I didn't think I would tell you is as we said in the in your.
The remarks that I like what I see in America, right now specifically United States, we're seeing utilization rates in the United States back at back in the levels of Covid work prior to COVID-19, we're seeing very high rates of utilization business aircrafts. This summer obviously, we talk.
By the seasonal effect and the fact that Europe kind of missed the whole summer because of Delta.
But going forward look to me you look utilization utilization rates are very much correlated by vaccination rates and if you look at if you extrapolate vaccination rates and of course that comes with the lifting of restrictions on our borders governments have to do and the ability for.
The ability for people to travel we've seen the pent up demand and how that's driving business I can tell you I was in the early part of the month of October I was that the I had a general meeting in Boston and I can tell you I mean, a lot of Ceos and I can tell you there is a palpable optimism out there as.
As vaccination rates you know.
Our increase in that first one the U S and win.
We're basically talking too.
Okay.
Airlines, specifically in those areas like United States, where we are seeing that that increase in activity.
As you know the vaccination rates are high and they were level of evictions volt, we can see a lot of activity as testimony by the rise in sales sales activity, which is not only testimony to the orders that we've announced so far but in terms of the activity that I see which is quite nice at the moment.
The level of and so she'll really look in terms of in terms of going back to the root of your question to predicting again I'll go back to what I said you read what you read what I read I mean, we have.
Situations CCD degrading in Germany, right now, we still have a very low level of vaccination in the far east. So I think those happen, but I think on the long term trend is getting better. So we will get better utilization in lock step with the increase in billet and flooding activity driven by that.
Session rates were not going to get ahead of it because we don't know we don't know I mean at the end of <unk> you look at there's a wide variety of estimates out there. It was since the beginning we said well look we'll follow the IATA forecast of what that seems to still be a pretty good one although I would tell you I think the U S.
Is beat that.
There's a vaccination rates pull up so long long answer to your question, but coming back to <unk>.
All I can say is when we do come across it when the traffic it does come back which it will.
With all the actions that we've taken I'm extremely confident that we're gonna be a much bigger a much stronger and a much more profitable.
And that's where we're headed.
Right that makes sense, if I can just follow up on the comments you mentioned about the airline Ceos being optimistic.
Lost airlines have come out recently, saying they are scrambling for pilots.
This is kind of counterintuitive to the industry lost a lot of pilots. So do you know what's happening there are pilots are people not willing to train pilots here.
The shortages coming from or there's not enough supply stream.
As much as that.
Well I think I've said before there's no doubt in my mind that there was a pilot shortage before the <unk>.
And theres going to be a pilot shortage after more part of the solution to that problem, Okay, and yet level. You know I think I've said this in a in a number of conference calls before the level of activity in our in our flight schools and will remember what are the largest network of flight schools in the world for training people to become airline paas and the level of that.
Activity there has not reduced throughout the pandemic, except for winter schools were shut down because we couldn't operate because COVID-19 I can tell you.
Carriers, including legacy carriers across the world have not only in most cases.
There are there are there.
Orders with us for a number of parts they want from us, but large case increase that and that trend that we see are there Scott I think become a pilot is a great career right now I can tell you that that's my view for darn sure.
And I think that's a great that's a great thing for us as a business.
Makes sense. Thanks for the answers thank you.
Thank you. Our next question is from the line of Kevin Chiang from CIBC. Please go ahead.
Thank you good afternoon, guys. Thanks for taking my question.
If I could ask the utilization question.
Maybe just focus on the Americas, Mark you mentioned.
It looks like these are basically back to maybe pre pandemic levels or close to given given the recovery in commercial aviation there.
Are you seeing a difference in maybe the split between.
What was in sourced training versus third party training because I guess.
As a thesis out there that as we come out of the pandemic there'll be a.
A greater opportunity for you to capture maybe more third party training as airlines might look to outsource some of this to reduce their costs are you seeing that in the U S. A as they bring back trading much more aggressively.
The answer is yes, and yes, we are seeing it.
The fact that a lot of the contracts that we've that we've announced in this quarter previous quarters are just testimony to that.
For a number of reasons number one days that people are seeking capacity and theyre looking for bathroom for training pilots and we could we can offered a capacity we've been part of our the activity. We've been doing is moving simulators into United States from other locations and actually what we increased our forecast on capital deployment this year.
Year that we announced at the beginning of the year some of that was going exactly towards this so to me.
That is a trend.
We predicted that trend that this is an environment, where there's going to be a lot more opportunities for people considering us as to really only viable global third party option, where and in fact, because pre Covid you do you do a million hours plus a year of training we offer a.
Very very good alternatives and so to me. It is look we have we have a lot of discussions a lot of discussions at Aida. We have a lot of discussion is ongoing and we are signing contracts.
We're signing contracts for you.
New Airlines, we're signing contracts for overflow training agreements, where people want excess capacity right now and there's a lot of cases, because they need it like right now or they want to ensure that they will happen as they ramp up operations to be able to seize the opportunity afforded by increased passenger traffic and when we do that you know were signed.
These people into longer term contracts, so that that activity for us will sustain.
That makes sense I'm not sure give a sense of like maybe what the breakdown is what was maybe pre pandemic between.
Pilot training that would've been in source versus outsource versus what it looks today I suspect this publicly.
Pretty fluid, maybe it's tough to pin down at the moment.
Well I can't give you a hard number right now because it's first of all such steady and it'd be very hard to compare it apples to apples or.
Number.
Future quarters, we can give it but right now I couldn't give you that certainty a number on that but I can tell you. It's more when you look at our contracts.
Traditional errors that were ordering.
Simulators announcing they know we'll basically.
Just sign up a contract with you to for you to provide the simulator and position that we did that was recently what SaaS, we gave with Westjet, we did away with Gannett.
So that's.
It's definitely more but again I can't give you a precise number right now in terms of the breakdown.
Okay.
And maybe just on the <unk> Center transaction you announced.
Maybe a week or two ago.
You speak to how you feel about your I guess your broader crew management flight management portfolio like do you feel like you have.
All the tools now to kind of.
The higher Tam that you've put out there or do you think you need to kind of backfill some.
Some of that product line, so and then.
I guess when you look at the epicenter of the client base.
The customers that they're dealing with versus the ones that you're dealing with I guess I'd be interested in knowing I guess, where are the opportunities to cross sell or do they have a large subset of customers that you don't you.
You don't deal with or vice versa, maybe offers an ability to.
Maybe to capture revenue synergies.
Well all of that I think but to be sure.
Really excited about this acquisition as I've said.
When we when we first acquired it in our press release recent D look first and foremost.
And we said this at the time, we acquired <unk> roster bustard the simulation.
Civil Aviation flight operations software market, it's over $2 billion.
Over 50% of that of that spend is outsource and what we're acquiring now we are acquiring a huge stake a leadership state in that market. So to me. This is a crowning achievement in that strategy and that's really what we're doing here you've seen us over the year move from what was <unk>.
But certainly when I joined <unk>, who moved from being a really a simulator partner to airlines moving deliberately towards being a training partner to the airline leveraging in the past few years, our digital offerings to make ourselves is central to customers providing them insights on your business that really.
That we could we can deliver to them using the data that we have on their operations and now what we're doing is we're moving from being this training partner to be coming it's technology.
And that's really just about you don't.
Growing the amount of work that we could do with the Chevron and I can tell you. It's very well received again I was talking about by meetings with shields at the <unk> meeting and obviously, we werent talking about sabre at that time, because we haven't we haven't announced the acquisition at that time. So we were certainly avoid talking about it but we did have met.
So a much smaller, but but differentiated offering in that market and I can tell you. There is there was no pushback whatsoever with regards to airline Ceos, which our customers about E, bringing bringing our expertise as a partner inquiry sourcing in flight planning.
They would see as a natural extension of what we do with them because it's all about delivery.
Central services to the airlines just like we do in training. So look this is a this is a great asset.
We have it all.
Pretty much all almost all of Sabres customers are our customers. There is we are getting more customers their structure, but to.
To me there's.
A lot of opportunities to leverage those relationships to cross sell and as well don't forget I really believe is just this morning by a contract. The first contract we announced this quarter literally has a contract with in a tech exit care I really believe that there is an opportunity set here for rolling this out across busy.
This aircraft, which is an untapped opportunity so again.
And by the way.
Leading testimony to July confidence in this business I've put on a multiple of our most senior.
Executives in our company to lead this business Pascal great working and I am very very high confidence that with Pascal working with a fantastic people that I've seen so far have been met.
As part of Sabre Air Centre.
We will do well in this business.
That's good color that's it for me. Thank you for taking my questions.
Thank you.
Our next question is from Kamran at Ericsson from National Bank Financial. Please go ahead.
Yeah. Thanks, Thanks, very much good afternoon.
Just want to come back to the I guess sort of the longer term.
Our margin target that you've got out there are 17%.
Do you see that would imply some nice improvement from where you were pre pandemic I am Wonder if you could talk a little bit about how you see the returns on capital evolving as your end markets normalize.
Obviously, the capital base has changed here with the acquisition of L. Three.
Also with the pending Air Centre acquisition, which presumably has a lower capital base. So any comments around the return on capital you would expect to see as things normalized.
We expect.
Expect them.
The returns those those increased margins just flow through.
As increasing on the return on capital. So you saw a few years ago before the pandemic, we had driven more than 300 basis points improvement in just a few years and that's an optimized.
Disciplined deployment of organic and inorganic capital ratios the capex that we're deploying the organic capital all have <unk>.
Significant incremental returns and driving 20% to 30% incremental returns within just a few years and as we've seen we've got very interesting and accretive.
Acquisitions and inorganic so as those deliver on our expectations that'll be driving.
Improved free cash flow all of these are free cash flow accretive and return on capital.
Okay.
I guess, maybe second question for me just on the restructuring activity. Just wondering if you can update on where we stand there I'm, particularly interested in the status of the kind of the training network reorganization. Some of the training centers have been consolidated and things like that so where are we in that process.
Absolutely so some great progress in optimizing the footprint and as Mark mentioned relocating sin, so taking them, where there's lesser demand and deploying them in the Americas and so on to serve market demand. So it really kind of optimizing that and use of capital and matching up the men or capital with that demand. So in this quarter.
And this quarter, we incurred about $13 million of costs $20 million year to date on the restructuring program and ultimately this quarter, we did finalize some additional UK consolidations or the U K, it's pretty much done and we've got the bulk of.
Done however, a couple of remaining consolidations in Europe and in South America that will see a clothing out in Q4, and but we already are seeing.
Significant amount of savings that you've seen that on in the quarter with a really good step up on the savings on a year to date basis and in the quarter and you see that on the civil margin right. So.
What I will note is that despite the timing of the delivery revenue on the product because of the lower deliveries at the Soi margin expanded to 18%. So that was the impact of the higher trading revenue with and utilization of only 53% and really highlights the great progress on the structural cost savings that were delivered in the quarter.
Okay.
I guess, the consolidation activity and the moving of stimulators into the U S. As you mentioned, we've done have had a negative impact on utilization rate in the quarter.
Well, absolutely when you when you're moving accumulator U a U turn it down in and it takes a few months to bring it down to move it and then to start it back up so but that does have some some noise in the utilization metric.
Okay perfect that was it for me thanks very much.
And don't forget the seasonality a camera that's definitely this was it was a different effect, but you know very similar in terms of business aircraft and so this year as well as commercial aircraft centers right.
Alright, great for sure. Thanks.
Thanks.
Thank you. Our next question is from Noah <unk> from Goldman Sachs. Please go ahead.
Hi, good afternoon everybody.
Good afternoon.
Mark I'm struggling a little bit to follow the.
The explanation of the utilization rate.
The attribution to the geographic difference.
Because if I look at the progression in the utilization rate you know it made it to this kind of 50% approximate 50% level.
For the first time in the September 2020 quarter.
And since then global ASM have nearly doubled and I understand you have the different geographic exposures with the weighting to Europe.
In Asia Pacific than North America, and that North America has been strongest.
Seat miles flown in Europe in that period of time have also almost doubled.
<unk> grown a lot and in Asia Pacific.
I think your simulator network is more exposed to narrow body and wide body. So I'm just not following but I understand your you have these exposures outside of North America, but there has been decent.
Decent recoveries, there and if I just take a sort of weighted average of those geographies relative to your exposure.
It doesn't really explain that utilization rates being flat.
Can you help me square that circle.
Well I wish I had a model that was that simple to be honest. It's really you can't take a weighted average to two or to look at our business just because the number of training centers that we have across the world I mean in the end of the day and don't forget that when you look at Europe, when Youre talking about there when people are flying a lot, they're not training a lot and so.
And that's why we always have a seasonal dip in the in the in the quarter, So really really what where when you get the big training activities is when they are preparing their preparing there when.
Do you have a steady state I was talking about they're preparing their crews, making sure that they can ramp up I mean, what we see right now we have utilization rates currently the Americas that are in the mid Seventy's range in some days hires and we followed by Europe, which has been approaching <unk>.
And in Asia, Middle East, which is still a pretty depressed level as I've mentioned in fact, the choppiness in moving to a profit of around 50%. So, but you know I can't stop that and the fact that it's.
It's really except for United States, which is pretty darn good.
They should recover to pre pandemic levels, you just can't take a weighted average there's a perfect correlation to ASM to just can't.
Is there an element where.
You know in a very severe downturn like we had.
When you're working your way back up you have airlines that do their own simulation and training those that have outsourced it and then those that do a combination.
But you just have airlines that.
Want to use all their own capacity before they then move back to outsource capacity.
Got it.
Absolutely absolutely because people do that they would do that but.
I would tell you, though that people that have all of that capacity.
At the end of the day that they still have to drive a lot of pilot demand, where those areas and they ramp that the ramp up like United States. They have to ramp up a huge amount of a pilot in a short amount of time now that's been somewhat mitigated in the Americas by the fact that because of the government support they haven't yet.
By and large.
<unk> the level of activity too weak.
Slava, so they had if you'd like to power power that they do not get into that situation, but even with that.
As testimony by our higher levels of simulator sales so far that so far this year and the activity level I see a full flight tested full flight simulators.
It makes me pretty darn optimistic and that's that as well I would basically they correlate that with all the conversations I have specifically with Ceos of airlines across the world, which is really what is the confidence that what I am seeing United States is a blueprint for what's going on.
But elsewhere.
Yeah.
Okay.
That makes sense.
And then just last one can you square us up on them.
Your business jet revenues and margins are.
At this point on a on a run rate basis compared to pre pandemic.
Yeah, Hi.
Are they above pre pandemic.
Yeah, Hi.
[laughter], we're doing well, we're doing well look I think we're no not being flip it here, but are the activity levels that we see is we're higher than pre COVID-19.
And Colette Covid levels in the in the Americas, certainly we are right now.
And I think we're doing well in terms of.
I don't think I want to get too much ahead of that prediction, except that it's that's factored into the outlook that we gave with regard sharp origin going forward then.
It's still surprised that you wouldn't be you know it is.
A question on leverage you know, we're throwing more towards more level of training activity at a quasi fixed cost.
Quasi fixed.
Based on business you know that the.
A major major expenses depreciation I mean, let's.
This setback is somewhat different because we're not selling right now we're selling courses. So we have to wrap up with an with instructors that kind of thing and they I think look sort of the same considered the fact that we're making an 18% margin.
53% utilization.
I think when you look at that that's got to underscore the progress that we're making.
Yeah.
No that's fair okay. Thank you so much.
Thank you.
Thank you. Our next question is from Ben <unk> with <unk> capital markets. Please go ahead.
Yes, good afternoon, everyone.
The current utilization rates do you see further unfortunately, these to reshuffle or redeploy the single serve fleet around the network.
We've done a lot of that already I would tell you, but otherwise it's not to say we won't do more we're always doing something but.
For the past couple of quarters, we've been we've been moving everything that's not tied down to that state.
Typically speaking, but I know theres been a lot of opportunities there.
So we've done that but I think that's I don't think that's a huge factor going forward.
Okay, Okay, that's great color.
You see with Merlot and also our sabre.
You're kind of entering a.
Okay.
Although market or slight improvement H been an optimization solution.
It seems that youre running at about 180 million in terms of exposure versus the market that you, calling close to $2 billion. So I would be curious to know more about the fortunate.
Sure.
Market share among the $2 billion market within the next five year or whether you see a fortunate these do to increase your market share on the organic basis. It may be through further M&A.
I look I think it's too early to talk about that it's been a while I would tell you I'm very confident in the business as I said that our first order of business is to transition that business. I mean as you will you will know this is a business that is extremely critical to the airlines date today, just like training is even put perhaps even more.
So for US is to make sure to transition the business very well without skipping a beat with regards to our customer at the same time and that's factored into the price that they are.
Our business case on this on this acquisition, we factored money to basically each solidify and differentiate the business with airlines that alone I think has.
Has a lot of potential and then yes, then you're talking about the organic.
Organic growth just testimony by the growth of aviation by itself, which will be double digits for quite a few years, just recovering from the pandemic than comms market share gains and don't forget what I said about theres opportunities to me on business aircraft, which can be used Virgin territory, but.
That's directionally in terms of quantitatively, it's I think it's way too early we haven't closed yet.
Okay and last one for me maybe for Sonya in terms of net debt to EBITDA from the four time post the sabre acquisition, what about the timing to get back to two five time and assuming there is still further M&A opportunities on the horizon, what would be kind of the Max level.
Feel comfortable with.
Well listen we always balance a solid balance sheet, which is accretive.
Investments and so you know the timing of whether it's organic or inorganic investments will drive some of that so.
We're at investment grade profile.
That's where we stay comfortable which is in the 35% to 45% net debt to cap.
So what I'll say is we expect it to go a little higher in Q4, and then to Delever quickly as we generate cash.
And generate cash out of the these new acquisitions and as our EBITDA ramps up quickly and so drive an improved net debt to or.
Our debt net debt to EBITDA ratio.
Okay, great. Thanks for the time.
Thank you operator, I see we've run a little longer than usual here I think we'd like to use the last few minutes. If we can to open the line to members of the media should there be any questions from media.
Certainly as a reminder, if you'd like to register for a question. Please press the one followed by the four.
Yeah.
Yeah.
Our first question is from Amit at all from <unk>.
Please go ahead.
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Bob.
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Sure.
We don't want people Julien.
Thank.
Thank you operator, so that's all the time, we have for the call today I want to thank all participants most people who're pseudo purpose fell.
And I'd like to remind listeners that a transcript of today's call can be found on <unk> website at <unk> Dot com. Thank you.
Thank you that does conclude the conference call for today, we thank you all for your participation and we ask that you. Please disconnect. Your lines. Thank you and have a good day.
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