Q4 2022 CAE Inc Earnings Call
Please standby the conference will begin momentarily we do appreciate your patience and I thought you. Please remain on the line.
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Good day, ladies and gentlemen, welcome to the C. H E fourth quarter conference call. Please be advised that this call is being recorded I would now like to turn the meeting over to Mr. Andrew part of it. Please go ahead.
Okay.
Good afternoon, or I should say good morning, everyone and thank you for joining us today before we begin I'd like to remind you that today's remarks, including management's outlook for FY 'twenty, three and answers to questions contain forward looking statements.
These forward looking statements represent our expectations as of today June one 2022, and accordingly are subject to change such statements are based on assumptions that may not materialize and are subject to risks uncertainties.
Actual results may differ materially and listeners are cautioned not to place undue reliance on these forward looking statements a description of the risk 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 Exchange Commission.
Edgar.
On the call with me. This morning are Mark <unk>, President and Chief Executive Officer, and Sonya Branco, Our Chief Financial Officer.
After remarks from Marc and Sonya, we will take questions from financial analysts and institutional investors. 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.
Yeah.
Thank you Andrew and good afternoon to everyone.
Thank you again to everyone joining us on the call.
Before Sonya and I get into the results.
I wanted to first say, how proud I am of our 13000 employees.
<unk> simplified our one <unk> culture and delivered a truly outstanding performance in fiscal 2022.
We set a number of order intake records this year, culminating in record bookings of $4 $1 billion.
And our record backlog of $9 6 billion.
These numbers are especially impressive considering that our industry.
In the early days of a cyclical recovery.
We are winning market share by innovating and delighting our customers.
This is because of the great dedication of our people.
Testament to their passion and commitment is that employee engagement has never been higher even with the added complexity of managing through a pandemic.
I'll talk I'll talk more about the way forward at the end of the call. But these are some of the most important factors that underscore my enthusiasm and outlook for a bigger stronger and more profitable CE in the period ahead.
Turning now to our results.
On a consolidated basis, we grew fourth quarter revenue by 25% and annual revenue by 23%.
Before the contributor of our ventilator, you're monetary initiative last year.
We delivered 32% higher adjusted earnings per share in the quarter.
For the year it was up 79%.
Testament to the quality of these results, we generated a healthy $188 billion of free cash flow for the quarter and $342 million for the year.
In civil we had strong performance with double digit growth in revenue and adjusted segment operating income and we generated margins north of 20% for the second quarter in a row.
Despite only prime disruptions during the fall and winter and continued market weakness in Asia.
Fourth quarter average training center utilization reached 69%.
Which is up about 55% last year.
Training demand in the Americas continues to be the strongest in the quarter easily absorbing the capacity we deployed recently into the region to meet our customers' increased needs.
We also had strong demand for new pilot training with record monthly hours flown at our flight school of Phoenix, Arizona.
Training utilization in Europe improved in the quarter with airlines, having become more confident about the summer travel period.
Asia Pacific was a bit better with some easing of travel restrictions and Singapore, Malaysia, but remain at a much lower level compared to 2019.
In business Aviation training demand was robust and reflects the high level of business aircraft flight activity, which is well above 2019 levels.
We overcame market and logistical challenges challenges to deliver seven civil full flight simulators in the quarter and 30 for the year.
We had strong order activity in civil overall in the quarter booking training solutions contracts valued at $517 million for a book to sales ratio of 119 times, including 15 full flight simulator sales.
Annual orders reached $2 billion for a book to sales ratio of one to two five times, including comprehensive long term training agreements with airlines and business jet operators worldwide and a total of 48 full flight simulator sales for the year, which is testament to the increased demand.
Pilot training.
This is a big step up compared to only 11 orders for all of the previous fiscal year.
Civil concluded the year with healthy order backlog of $4 9 billion.
We also expanded our horizons during the year by partnering with four of the leading electrical vertical takeoff and landing.
Developers to provide a range of solutions, including simulators pilot and maintenance training programs and aircraft systems engineering.
Support.
Additionally, we concluded the acquisition of Sabre Air centers airline operations portfolio during the quarter, giving us a valuable suite of flight and crew management and optimization solutions and a highly talented workforce, who we welcome warmly to see.
The acquisition is part of our strategy to 10 civil beyond training and access to an even larger portion of the civil aviation market that we already addressed.
We continuously innovate to earn our right to be our customers' training partner of choice and now we're expanding our aperture to also become their technology partner of choice.
I am very encouraged by the positive customer response, we've had already with airlines and business jet operators greeting CE as a highly logical partner for these solutions.
In Defence, we also had double digit growth in a quarter with the contribution of <unk> military training and I'm, especially pleased with the acceleration in order intake with bookings totaling a record $751 million in the quarter or one six times books to sales ratio.
Notable wins in the quarter include a contract with the government of Canada to extend and expand the NATO flying training in Canada program through 2027.
Defence also broaden its customer access with a U S $250 million ceiling U S Naval Air systems command contract or rapid acquisition prototyping integration and development.
Which is an I'd Iq win.
Defense concluded the year with a record $1 9 billion in orders included including competitive Prime awards across all five domains that being air land Sea space and cyber.
This higher level of activity contributed to a $4 7 billion defense backlog, representing one two times book to sales for the year.
Notably this is the first time, our annual Defence book to sales ratio has been above one in the last four fiscal years.
A key to driving higher performance in the years ahead.
We also concluded the year with a record $8 6 billion of defence bids.
Pending customer decisions.
Turning now to health care, we delivered our fifth consecutive quarter of double digit year over year revenue growth, excluding ventilators, and we generated sequentially higher profitability in the fourth quarter.
One noteworthy order during the quarter include included at collaboration between Health care and defense to win a contract to support the German armed forces by providing patient simulators user training and maintenance support.
This collaboration is a great example of <unk> Cross business synergies and is testament to our unique <unk> culture.
A good progress in healthcare during the year reflects a clear focus on achieving greater scale and the ramp up of our Ria energized organization.
We began worldwide deliveries of our newest pediatric patient simulator CAE area, and we launched updates to expand expand the future set and functionality of some of our main product solutions, including <unk>, Our ultrasound education platform see Cath lab, Dr and E learning space with that I'll now turn.
Turn the call over to Sonya, who will provide a more detailed look at our financial performance and I'll return at the end of the call to comment on our outlook Sonya. Thank.
Thank you Mark and good morning, everyone I first want to thank our stakeholders for their patients and the delay in getting the results out team our auditors required more time than anticipated to complete the technical task involved in the normal course on it.
Turning now to results, we delivered a strong performance in the fourth quarter and for the year, having worked diligently to overcome the ongoing COVID-19 related challenges and delivered double digit revenue and adjusted segment operating income growth and higher margins.
We also generated excellent free cash flow and help to secure future growth with record order bookings and backlog, we have effectively deployed growth capital seizing on opportunities to expand our market reach and we achieved our targets on restructuring program to lower our cost structure by approximately $70 million annually.
We also continue to be on track with the integration of our acquisitions and the realization of planned cost synergies within the expected timeframe.
Looking at our results on a consolidated basis revenue of $955 million was up 25% compared to the fourth quarter last year, excluding a $130 million of revenue per ventilator.
Adjusted segment operating income was $142 7 million.
Compared to a $106 $2 million last year.
Quarterly adjusted net income was $92 million or 29 cents per share compared to 22 cents in the fourth quarter last year.
For the year consolidated revenue was up 13% to $3 4 billion.
And it was 23% higher excluding 200.
$36 million of revenue last year from the balanced ventilator contract.
Adjusted segment operating income was up 58% to $424 5 million and annual adjusted net income was $261 million.
Or <unk> 84 per share, which is up 79% compared to 47 last year.
We incurred restructuring integration and acquisition costs of $36 million during the quarter related to the <unk> Harris military training and Air Centre acquisition, and our enterprise wide restructuring program.
Net cash provided by operating activities was $206 $8 million for the quarter compared to $174 6 million in the fourth quarter last year and for the year, we generated $418 2 million from operating activities compared to $366 $6 million last year, we had a strong free cash flow in the quarter.
$187 $6 million and 341 $5 million for the year for an annual cash conversion rate of 131%.
Uses of cash involved funding capital expenditures for $74 7 million in the fourth quarter and $272 2 million for the year, which is in line with our outlook of total capex of more than $250 million.
So these growth Capex is mainly driven.
By the expansion of our civil Aviation training network, and typically generates 20% to 30% range of incremental return on capital employed within the first few years of appointment these opportunities translate to some of the best examples of growth compounding FCA.
Looking at fiscal 2023, we continue to expect Capex of approximately $250 million.
Reflecting a large pipeline of attractive market light expansion investment opportunities on the horizon horizon.
Our net debt position at the end of the quarter with approximately $2 7 billion.
For a net debt to adjusted EBITDA of three six times.
This compares to net debt of $2 3 billion and three two times net debt to adjusted EBITDA at the end of the preceding quarter.
During the last two fiscal years, we made several and growth investments to expand our capabilities and reach.
Including nine acquisitions totaling $2 1 billion and capital expenditures for some $380 million.
We're continuing to focus on attractive growth opportunities and at the same time, we expect to reduce leverage with net debt to adjusted EBITDA decreasing to below three times within the next 18 months.
Income tax expense this quarter was $3 7 million, representing an effective tax rate of 6% compared to a negative effective tax rate of 21% for the fourth quarter of fiscal 2021.
The tax rate was mainly impacted by restructuring integration and acquisition costs. Excluding the effect of these elements. The income tax rate would have been 15% this quarter and 14% for the year.
Reflecting some of the recent changes we have seen the global tax regimes, we expect the effective income tax rate to be approximately 22% going forward.
Also below the line non controlling interests was $2 million for the quarter and $8 3 million for the year, we expect NCI to continuous increase commensurate with the growth rates of <unk> adjusted segment operating income.
Now to briefly recap our segment performance in civil fourth quarter revenue was up 11% year over year to $432 7 million.
And adjusted segment operating income was up 45% year over year to $96 3 million for a margin of 22, 3% for the year Civil revenue was up 15% to $1 6 billion and adjusted segment operating income was up 92% to $314 $7 million for an annual margin of 19 five.
5%.
In defence fourth quarter revenue of $469 $5 million was up 40% over Q4 last year, which includes a $146 9 million from the integration of <unk> Harris, Terry training and our financials.
Adjusted segment operating income was up 59% over last year to $36 8 million.
For an operating margin of seven 8% for the year Defence revenue was up 32% to $1 6 billion.
<unk> $409 9 million from the integration of <unk> Harris military training and adjusted segment operating income was up 37% to $119 2 million.
Representing a margin of seven 4%.
And in healthcare fourth quarter revenues was $52 8 million up 27%, excluding the ventilator contract last year adjusted segment operating income was $9 6 million in the quarter compared to $16 4 million in Q4 last year for the year healthcare revenue was $151 4 million up 25.
5%, excluding the ventilator contract last year and adjusted segment operating income was $10 6 million for a margin of 7%.
With that I will ask Marc to discuss the way forward.
Thanks Tanya.
As we look forward, we continue to see a clear path to emerge from the pandemic, a bigger stronger and more profitable in the years ahead.
We're definitely playing offense in a disrupted market by seizing on highly strategic growth opportunities to expand our capabilities and market reach in parallel we've significantly lowering we significantly lowered our cost base and continue to innovate ways to revolutionize our customers' training in critical operations.
With digitally immersive solutions deliver safety efficiency and readiness.
Despite a still challenging environment there.
There is no doubt our strategy is bearing fruit with several risks record milestones already reached in the early stages of a cyclical industry recovery.
Our recent results.
Any expanded set of opportunities before us add to my conviction that key is poised to experience new heights as we recover from the cyclical downturn and ultimately benefits from secular growth in our end market.
In civil we see pent up demand for air travel is an important driver in the near term and the rate of civils recovery to pre pandemic levels and beyond is expected to continue to be driven in large part by the easing of travel restrictions, particularly in our key Asian markets.
We also expect more demand from airline customers wanting see support as partner of choice to secure and train new pilots.
They are acute needs arising from the challenges associated with storing and growing flight capacity in a competitive market for pilots and flight crews.
This dynamic.
<unk> for civil training recovery in the Americas.
And the sharply higher full flight simulator order activity. This past year provide a compelling blueprint for the potential for a broader global recovery.
And in business aviation, we remain bullish on the long term and we believe the market is experiencing experiencing structural expansion.
As evidenced by a record $3 3 million flights worldwide last year.
In fiscal 2023 in addition to growing continuing to grow our share of the aviation training market and expanding our position in aviation digital solutions we.
We expect to maintain our leading share of full flight simulator sales and to deliver upwards of 40 full flight simulators to customers worldwide.
From a profiling standpoint, we're planning planning a higher proportion of deliveries in the second half of the fiscal year.
Overall, we expect continued recovery and growth in civil in the year ahead.
In defense.
We're on a multiyear journey to becoming bigger and more profitable in the first and most critical link in that chain involves winning orders.
Our record order intake this past year makes it clear that we are indeed on the right path to growth.
Furthermore, our record level of defense bids and proposals is a result of bidding more and bidding larger.
With our increased capabilities across all five domains and a critical mass that our transform defense business now possesses.
No program in our addressable market, that's too large or too complex for etsy to bid on with a high probability of success.
Our defense business is now closely align with our customers' utmost priority, which at their foundation are above defending freedom in the face of near peer threats.
While we could not have known how or when such geopolitical threats with benefits they have.
And we're extremely proud of <unk> role in helping prepare NATO and Allied nations to defend freedom.
We're also very proud of our noble purpose to help make the world safer and then last two year defense has enabled that purpose by establishing our position as the world's leading platform agnostic global training and stimulation pure play defense business.
Russia is an invasion of Ukraine over the last three months has galvanized national defense priorities and we expect increased spending specifically to prioritization on defence readiness to translate into additional opportunities for <unk> in the years ahead.
We also expect continued strong momentum with the integration of <unk> III Harriss military training in the year ahead.
And to fully realize $35 million to $45 million of cost synergies by fiscal year 2024.
We look forward to continued growth in the year ahead.
A few headwinds still exist for the international defense business in terms of travel restrictions.
We view them as temporary.
We're also continuing to work our way through some of the lagging effects of a historically less than one book to sales ratio.
Beyond which we expect higher ROE from integration synergies and.
And the translation of our recent record order intake in bid activity into revenue.
And lastly in healthcare the long term potential is increasingly evident for this business to become a more material and profitable part of C. As we gained share in the healthcare simulation and training market and continued to build on the great momentum created by the re energized team over the last 18 months.
For CAE overall based on everything we see at present.
Targeting consolidated adjusted segment operating income growth in the mid 30% range fiscal 2023 weighted more heavily in the second half of the year.
In summary, our.
Our opportunity set for sea as highly attractive and that continued to be very excited about our future.
We expect to continue making excellent progress in a year ahead and beyond and we look forward to sharing more about this with you at our Investor Day on June seven in New York.
<unk> management team and I will be on hand to present, why we believe <unk> is so well positioned for superior growth and higher profitability.
We will also showcase some of the latest technological solutions.
And provide a view on cae's multiyear growth potential.
She is a highly unique company who's cutting edge training and critical operational solutions empower pilots crew members defense forces and health care practitioners to perform at their best every day and when the stakes are the highest.
We equipped those in critical roles with the skills and expertise needed to move our world.
<unk> safely.
We also enable our customers to.
Performed their complex tasks more efficiently and with a lower carbon footprint.
At the very core <unk> mission is to make the world safer.
In addition to sharing a compelling financial picture, we hope investors will come away from our Investor day, with an even greater appreciation of seasonal purpose a major driver for all of us.
With that I. Thank you for your attention without ready to answer to your question.
Thank you Marc operator, we will now be ready to take questions from analysts and institutional investors.
Thank you if you would like to register a question or comment. Please press. The one followed by the four on your telephone.
You hear a three till them prompt to acknowledge your request is your question has been answered and you would like to withdraw your registration. Please press. The one followed by the three one moment. Please.
The first question comes from Kevin Chiang of CIBC. Please go ahead.
Good morning. Thanks, Thanks for taking my question.
Maybe just two for me first one on your because you recovered soi margin target you've stuck to the 17%.
Hmm.
Which gives us a northstar.
As our revenues recover here, but that number hasn't changed I think over the past few quarters here, obviously the inflationary environment.
Wondering.
How do you see those margins progressing here just given the current.
Current inflation environment to the composition of about 17% has that changed or do you feel like.
The restructuring efforts more than offset the inflationary pressures are or maybe pricing power helps helps with another lever just just wondering how about 17% comes about in a higher inflationary environment here.
It Hasnt changed much Kevin yes, although we're certainly not unaffected like anyone else with DSA share environment, but we've taken steps to protect ourselves from that.
Through various mechanisms some of those to mention which is being able to pass on some of the cost onto price increases to offset some.
We relentlessly reduce our cost that helps as well.
Have built in.
Measures in our contracts.
For two for to be able to cater for that as well.
Kind of a normalized fashion and I think in terms of the composition of that Hasnt really changed who we were expecting.
Higher peak margins in civil.
And we expect certainly to get.
Within our planning horizon to low double digits. So margin defense I think that composition hasn't really changed.
That's still our Northstar.
That's super helpful and maybe just a second one for me.
A lot of headlines around the pilot shortage, especially.
Especially in the U S and one of your partners.
Blue recently.
Noted that one way they are combating that.
Leveraging I guess, a gateway program, which I believe you have a partnership with them and believe they felt that focusing on onboarding cadets early what was helping them get in front of the labor bottleneck.
So I'm wondering.
Other airlines spacing pilot shortage issue or are you seeing.
Increasing conversations around setting up gateway programs with other.
The U S Airlines are global airlines with the idea of the compound to get the to get an early that might help alleviate.
All the charters.
As you kind of look out.
Down the supply chain.
Well I think first off we're very proud of the relationship we have with Jetblue as well as other airlines unique edge states and around the world with pilot programs like the Gateway program that we have with Jetblue.
Yes, we're seeing strong demand as I mentioned in my notes the enrollments in our flight schools, particularly the one that we havent Phoenix that caters for Jetblue amongst others American for example.
Seeing record order intake in terms of cadets.
So Luke.
We are basically seeing airlines being impacted by pilots.
Certainly in the United States strongly right now and we're doing everything we can to be able to support them with.
Providing pilots through our park aviation business for example, which we do we supply part of pilots and that's seeing some strong demand. We're also seeing as I mentioned in enrollment in our private schools and look I think this is something that will continue to be a factor in the fact that airlines are.
We are in great need of pilots.
Is to me.
<unk> long term business for CAE as the largest provider of pilot training in the world. So we're going to continue to help our airline customers and expand those programs.
And.
Our our old focus our own actually forecast on that is I think we've said it before is that we estimate that.
There are over 200 order of 264000, new pilots are going to have to be created over the next seven to eight years to accommodate the retirement that we've seen the attrition that we see as well as a new growth thats going to come across just assuming kind of the growth that you that IATA is.
<unk>. So look I think we're going to have a lot of business going forward on this.
Excellent. Thank you for taking my questions.
Thank you.
The next question comes from Kunal <unk> with Scotiabank. Please go ahead.
Good morning, and thanks, everyone.
Just wanted to follow up on Kevin's question on the pilot shortage.
Is there a way to.
To quantify that.
Population of the current population of pilots going through training at this time versus what it was prior to the pandemic and starting to get a sense.
If the pilot shortage.
There is it hurting the airlines.
Growing above and beyond the pandemic causes it.
Is it a hurdle for them to get back to the full but you found them that could go away.
I think it's definitely a headwind right now and I think there are better there Barry better position to be able to answer that question than I am but it really depends on the airline and we're really you're really seeing that materialized itself, mainly at theaters theaters to the main lines because largely the main lines.
Have been able to cater it although theyre seeing theyre seeing some of that hit as well as some of our major partners in the United States and definitely I think we're seeing an extraordinary level of demand right now in the United States, specifically, we've talked about that before which is benefiting our Europe .
Our our market quite substantially and Thats why youre seeing very high levels of utilization in the United States. Specifically that is the fact that we've been talking about it and there's a lot of.
Delta training being able being caused by the fact that you are bringing on more pilots.
I think it's something that I don't think structurally it's going to affect the recovery overall of the market in a sustained fashion, but as there is note that there is no doubt that is having an effect right now as I think I've said many times before I think it's a great time to start a pilot career.
We will have growth for the years to come and I think thats going to be a strong driver for our business for <unk>.
The largest training training our pilots in the world.
Alright that makes sense I think that by the way you'll see that by the way there and just in the as I was mentioning in my notes the strong demand that we've seen for full flight simulators I mean, all of last year. We had 11 full flight simulator sales and the past year that we just closed we had 45.
That is for the year.
That is a huge ramp up so actually 48 for the full year, thus a huge ramp up something that we've never seen in terms of going from a downturn usually two.
Two or three years lag we've had no lag. This has been a huge V shaped recovery and again that is testimony to airline stocking up by similar so they can train provide type range new pilots.
Okay. Thank you and then switching gears to defense actually.
So the last quarter and the quarter before like <unk> seen a pretty significant exploration I think in defense order intake.
And obviously now you have got some tests as well.
Thank you some of the mix too.
Pipeline here, what do you kind of suggesting it's north of $8 billion. I don't think we have seen those kind of numbers before historically, it's probably more than twice what we used to see prior to the pandemic I'm just trying to figure out if there is any.
Momentum in defense order intake our bid pipeline because of the recent announcements by global defense forces to increase spending.
That has still to play out.
We had our reed jumps up that cycle for global defense spending dropping off.
I mean.
To your question that has still to play out.
You are seeing in the.
Much larger backlog of bids is us bidding more and bidding larger with our combined capabilities of what is called we call. It.
<unk> legacy and our business combined will tree Harris military training.
Thats, what youre seeing here, we're seeing much more opportunities to be yet to bid and as I said it might notice is almost there is no contract.
No.
It's too large or too complex in our addressable market for us to bid. So I think that's very positive.
Again, as I said, if you're seeing a much larger level of bidding activity and you're seeing the fruits of that through web. If you look every quarter last year.
We started we started the year with less the book to Bill that you had I think Q2, you had pretty much one to one that you'll have over one in Q2 Q3 and much higher in Q1 in Q4, I think that's a nice trend.
I said it doesn't it doesn't turn into revenue immediately.
But it definitely shows you that we're on the right path. It over the next few quarters definitely that will start to make an impact to our results as it translates to revenue.
Okay. That's it for me. Thank you so much.
Operator, just to make sure that everybody has a chance to ask a question maybe we would ask our participants to stick with a single part question and we're happy to take more if time permits and just reenter the queue. Thanks.
Thank you noted the next question comes from Cameron <unk> with National Bank. Please go ahead.
Okay.
Yeah. Thanks, good morning.
I had a question on the I guess the Air Centre acquisition. When you closed that during during the fourth quarter I just wonder if you can comment on kind of your early thoughts on the business and how it's integrating into the existing CAE busy.
Business and it can also maybe talk a little bit about.
The recovery pace for four that are center business.
How does that compare I guess with kind of the.
Airline pilot training demand to just sort of.
Compare and contrast, those two.
Well, what I would say our cameras. The integration is progressing progressing very well since we closed the acquisition on March one I have and we see no surprises I'm very excited about the potential as we move as a failure in my notes from really being a training partner to the world's airlines to a technology.
Partner had been very very happy about the reception of our customers.
As we said when we talked about the acquisition there is almost it's almost 100% overlap between those customers that we serve on a training from a training.
Similarly, our standpoint to those that use any one of sabre air centers to what we used to call temporary centered Ellis <unk> services.
With software tools, so very very pleased with how that going.
One of my top key executives running that business Pascal grainy and we're very excited about what we see.
In terms of its growth I think no surprises there.
The business is there is very highly correlated to the amount of planes flying the amount of crews flying and.
It's basically our performance be in lock step with those numbers and we're very happy with what we're seeing before I think more to come I think.
<unk>.
The fact.
He is like.
We're extremely positive about that as we're ready.
$2 billion of total accessible market now in civil and in a market where really we're talking about just calling the level of business that we do with our existing customers.
So more to come but so far great start.
Okay, great to hear thanks very much.
Thank you. The next question comes from Asahi Shimbun BMO. Please go ahead.
Good morning.
Thanks for taking the question.
Congrats on strong orders.
The.
Civil Aviation Tonya can you quantify for us like how much these re measurement of royalty.
And reversal of few of you are now contributed to.
The aviation in the fourth quarter.
Sure Savi. So so you're right there was a higher level of gains this quarter and this is this came from the re measurement of royalties and contingent considerations and the royalties themselves are pretty much a recurring item every year. If you go back to Q4, we had some last year as well and it's really kind of based on 20 year plus horizon estimate so it flows.
All three segments, but the larger proportion was in civil now the accounting presents that Amit.
Other gains and losses line, what what it doesn't consider is that we did have a host of other higher than usual costs that are not necessarily kind of singled out in that separate line, but are in cost of goods sold and SG&A. So for example.
With the omicron and two ways there was a significant.
Significant ramp up in our Covid protocol, and security costs, including like higher cost and productivity.
Impacts from absenteeism and also some unusual supply chain logistic costs that we see as temporary but that increased in the quarter. So on a whole it was not overly material to see Annette civil as a whole right. So so really not a major impact on <unk>.
Or margin.
While we're speaking about that I just highlight that.
These gains are relatively noncash so despite that we delivered pretty strong cash conversion of 131%. So it kind of speaks to the operational performance and the quality of earnings in the quarter and the year.
And maybe I can okay.
Yes.
As well <unk> debt.
Another confidence you might gain is the number that we have is the baseline for the growth forecast that we have a 30%. So that's number we start with we don't try to normalize it.
Yes, the growth outlook that we gave for next year in the mid 30% range is off the adjusted Soi of $445 million.
That includes all of these items.
Okay and that gross number for next year is applied the same cannot be defense and aviation.
Yes.
Okay. Okay.
Organic growth number within the aviation, but youre, assuming because I know you bought kind of.
<unk> will have a full contribution next year and you've had some.
Cost restructuring initiatives and all of that is like what would be the organic growth you are assuming.
We've factored all of those elements, whether it's the as we integrate really you'll be driving organic revenue and cost synergies as well as the impact of the structural cost savings and the ramp up whether on recovery and expansion of our market position with customers.
Okay, great. Thanks.
See you next week I guess, thank you.
Yes.
Thank you. The next question comes from Ben <unk> of Deutsche Bank. Please go ahead.
Yes, Hi, this is Michael on behalf of Benoit Congratulations on the good quarter I, just can add little more color on the cloud computing and transition adjustment and for EBIT.
Was it just a matter of fact of moving our.
Legacy systems, and the software to the cloud from a from the previous system. Thank you know are not an operational item at all frankly it.
Just new guidance coming out of <unk> on how to account a criteria for cloud computing and SaaS is.
Companies have growing ERP that are either kind of housed in house or on SaaS applications. So so new or revised guidance on that front and so that we're just applying the updated guidance as an accounting change and so it's really nonrecurring in nature, but not nothing operational.
Thank you I appreciate it.
Thank you.
And the next question comes from Ben will talk to you.
Please go ahead.
Yeah Okay.
Was finally able to you to joining saw good morning, everyone and congrats for the quarter.
Mark looking at the global defense budgets, obviously trending upward.
You provide some color about the timing of when we might see.
Potential implications on what or who you see greatest unfortunate fees either on the service or product side.
<unk>.
Well I think I'll always start that question to say that the day that fees revenues are a proxy for the growth of the U S defense budget or any budget I'll be very happy.
So that's not the case, we still although we're very big in our space I think the size.
That budget dwarfs any aspiration. So the fact that theyre going up is a good sign but but I think.
We can do very well, thank you and grow beyond the <unk>.
Our levels of growth for those inherent budgets and that's certainly our growth outlook.
Where do well, we're well, we're very well aligned with the priorities that are inherent in the defense budgets, which as I said is.
Make sure that the readiness for <unk>.
Near peer fight that's what we do.
And Thats been made even much stronger now with our combined business with <unk> X Harris <unk> military training business. So look I think it's going to be a combination of both products and services.
When I look at the backlog that we see.
It's basically a mix of the two.
So I wouldn't go too much beyond that except that again, where we're <unk>.
Forecasting strong growth in defense, and we're well on the path to be able to do that and.
I think Don don't look at the.
We continue to look at defense on a 12 month basis, that's what all I will always look the orders that we've won in the past year, which is very very encouraging I expect will continue.
Look at this on a 12 month period basis, it will translate to revenue.
In the upcoming periods and we're well on the way to the target that we have strong growth in low double digits.
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Okay.
Thank you very much.
Thank you. The next question comes from Noah <unk> of Goldman Sachs. Please go ahead.
Hi, good morning, everybody.
Good morning, good morning.
A lot of questions in the marketplace about the assumptions behind the 23 framework of segue.
Segment, EBITDA mid 30 percents APA.
I appreciate that.
Different companies are providing different versions of guidance that you've given us some framework.
Perhaps you could just put a little more detail behind that in terms of what.
What youre seeing in the segments.
What kind of utilization rates youre assuming.
Growth, you're assuming in the segments, maybe and I guess, particularly on the margins the margins changed through the year a lot last year, so how to how to maybe the margins compared to the exit rates.
2020 material.
Yes, anything that stands out I guess would be helpful.
Well I don't think when I look at basically a question I'm not sure too much withstand bus standout except maybe.
Perceived lumpiness through quarters, I've said, many times and I've said it again in the.
In our notes.
More of a back ended 2022 and there is a reason for that reason.
I look at civil specifically.
First of all I will tell you that the higher utilization rates.
Are a factor, we're seeing sequentially a higher utilization.
Utilization rates and we're going to continue to see that with very high level of airline based activity in the U S. We're seeing much stronger in Europe , we're starting to see although it's much slower we're starting to see Asia open up.
It's very very good that now we see sang Shanghai, Shanghai, but we see Singapore opening up we see Malaysia opening up that's very good although you can well imagine that.
There's a lot of travel that's.
And China dependent so thats still pretty low with it.
Lockdowns in Shanghai.
Just just now opening up so that's going to have some lag effect for quite a while I think and for that I mean, we continue to look at the.
I had a forecast as the basis for.
Our forecast, which as you know.
Our PK growth and how fast turn translated utilization, so if I come out that stronger utilization as a whole.
We're definitely seeing the leverage effect, Kevin if you look at the fact of the margins, we're making a civil overall.
Still a much lower than peak utilization I think youre seeing there both the benefits of the leverage effects on it.
<unk>.
That is translating to the bottom line there are civil.
And Youre also seeing the benefits of our cost savings that we've put through the restructuring program that are definitely panning fruit.
It's very clear that we will continue so I think youll expect to see a higher margins there, but you got to look but we'll have to look at is that.
Similarly, our deliveries from the factory also a big factor of that and I see those being more more biased to the second half of it and that's just a consequence of where there are in the production line and typically in the summer period. We have for example, we have.
Yes, we can shut the factory for maintenance that thing and that's not going to be any different this year.
The other thing is you have to look at the airlines.
Airlines in the first and second quarters.
Very much in the second quarter. They are flying and therefore, they are not training that's definitely going to be a factor. This year, we haven't seen that seasonality as much during COVID-19 for obvious reasons, but we're going to see it. This year. So I think thats the color I would give it.
In terms of the defense, what I would see as those orders that we've seen okay, they're going to take time and we have this.
I would like to say we have like this.
Big animal that's making its way through the snake right now.
Those big orders and that's going to do to translate that's inevitably going to drop to the bottom line I expect that if that doesn't happen overnight, okay, but it definitely is going to start affecting the year I think that against the back half and that combined all of that that translates into the outlook that we've given in terms of.
Type unit, 30% growth.
Okay I appreciate it mark.
Thank you.
Thank you.
The next question comes from Kristine <unk> of Morgan Stanley . Please go ahead.
Hey, good morning, guys.
Good morning, guys.
Mark.
Aviation is the safest form of mass transportation today, but when we kind of look at the pilot shortage issue. Some of them are advocating for the reduction of the number of pilot.
In either some of the long haul flight or for freight.
Especially as we're seeing more automation in the cockpit.
As we balance out with like the safety requirement of the industry and the shortage issue can you comment on how credible U K the reduction of pilot will be in the EBIT the cockpit or the requirement in our flight and if we do see this reduction were.
You think that could come out first.
Well look I I don't well first of all I've been around the industry for over 35 years, the east before CES I used to design airplanes for the airplanes that are transport category airplanes.
I'm pretty well versed as clients call. It an expert in this domain of what's required to certify airplanes to be able to safely transport passengers. At this time I would say, it's not a technology that doesn't exist. The technology exists in the world's defense forces do it every day in fact, we have high expertise in doing it for free.
The years, we have been <unk>.
Conducting the training for for example on U S Air Force Flying predators, playing Reapers. For example, we have strong capabilities in that when we deploy and we bid around the world in defense.
First of all.
Aviation.
You nailed it on the head that the overwhelming priming consideration is the safety of the traveling public and.
This is as you said again, the safest border transportation in the world that that the reason for that is because the regulatory framework for the design of aircraft continues to relentlessly advance based on the lessons learned of it.
Incidents that happened the reports that come out of National Transportation Safety Board recommendation with translations, who changes to your comp by FAA by the bias for example than theirs and which saw them for the airplanes get safer and cheaper all the time also inherent in that is the safety of the air crews themselves, that's where we can.
As we come in and obviously the leader in the world working with the world's regulators to ensure that the training of those pilots is at the utmost.
Standard error airlines are not getting airplanes are not getting less complex automation is not getting less complex.
So the past has to be trained effectively so.
Going straight to your question I don't see anything within the planet planning Horizon, which tells me that we will have a single pad or airplanes or certainly no pilot aircraft in considerable future.
It is a very long time.
Don't forget that I think even if you.
Let's say if you were to assume that.
One pilot and a few other planes flying with one pilot then you'll have to certify the airplane assuming there is no pilot because.
Bob just to use an easy example, one bad hamburger in that pilot to being capacity. Therefore, you have no pilot, so and the fundamental fundamental.
Concept of design of airplanes for flying passengers around.
Around the World is that no single failure can could result in the loss of the aircrafts. So obviously if you have one pilot finally aircraft and he or she is in capacity than you have violated that rule. So.
If we do see it one day and I think it's a long way off I would anticipate that it will happen on long term long haul flights.
Involving cargo, that's where I could see but again.
I don't see that for a long time.
Thanks Mark.
Thank you.
The next question comes from Tim James TD Securities. Please go ahead.
Mr. James just you're on mute, we're unable to hear you at this time.
<unk>, Tim James here.
So I am just wondering if you could provide some additional color on the Capex plans for fiscal 'twenty, three and maybe just talk about.
A bit of a breakdown or give us a sense for capex and in defense versus civil.
And maybe any specifics on sort of markets or product lines or service lines with each.
Within each segment.
As part of that is it possible to get a bit of an idea of what expected growth in SC uses and how capex drives that this fiscal year.
Okay, well I think the split of our projected capex not going to be overly different than what you've seen historically, the lion's share really goes to civil.
Civil and expanding our civil Aviation network and I said it in my remarks, I'll say it again.
This is growth capex that is linked to our direct market demand customer order intake new new orders that we see are long term contracts that we've signed that have accretive returns and cash flow. So wherever we can secure a long term recurring regulated.
Revenues that are can be 20% to 30% incremental return accretive within a couple of years. This is this is some of the highest growth accretive investments that we can make in terms of color.
Once again, it will be really focused on deploying that civil are expanding at several network.
A lot of opportunities on the business jet side with.
With kind of significant activity.
Structural expansion, so we do see a lot.
A large portion on that capex going in business jet, including three new training centers that we're opening up fast Savannah.
And in Las Vegas, our west the West Coast, one specifically a larger one.
And also a lot of opportunities on commercial side.
Market Mark was speaking to.
The recovery in that market, which is really a blueprint for what we hope the broader recovery will look like as the other regions kind of catch up but those are some commercial deployments on especially on the U S side, So where we can as part of the restructuring program. We are redeploying under.
Underutilized assets or assets with lower recovery profiles and moving them over to the U S. But also deploying new opportunities as we are signing contracts with customers.
Okay.
Focus on <unk> and.
And definitely a high proportion of all of that investment being in the Americas that we see for next year.
Great. Thank you Sonya that's very helpful.
Okay.
Thank you that was our final question from financial analysts.
Thank you operator, we'll now open the lines to members of the media.
Thank you as a reminder, you may press. The one followed by the four if you would like to register a question or comment once again that is the one followed by the four.
And our first question comes from Julian <unk> of <unk>. Please go ahead.
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Thank you very much operator, and I want to thank all our participants for joining us today and remind you that there'll be a transcript of today's call on <unk> website.
Dot com, thanks, very much have a good day.
Thank you. This does conclude the conference call for today, we thank you for your participation and ask that you. Please disconnect your lines that can have a good day.
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