Q3 2023 CAE Inc Earnings Call
[music].
Okay.
Good day, ladies and gentlemen.
Welcome to the third quarter conference call.
Please be advised that this call is being recorded.
I'd like to turn the meeting over to Mr. Andrew aren't of it you May now proceed Mr. Han.
Good afternoon, everyone. Thanks for joining us on the call before we begin I'll remind you that today's remarks, including management's outlook and answers to questions contain forward looking statements. These forward looking statements represent our expectations as of today February the 14th 2023, and accordingly are subject to change such statements are based on.
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.
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 Mark <unk>, President and Chief Executive Officer, and Sonya Branco, our Chief Financial Officer.
After remarks from Marc and Sonya, we'll open the call to questions for financial analysts at the conclusion of that segment will open the lines to 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.
We had strong results in the third quarter, driven by civil double digit growth defense sequential improvement and health care increased profitability.
Well also ensured our path to future growth by securing securing over $1 $2 billion in total order intake for a record $10 $8 billion backlog and one to two times book to sales ratio.
In civil.
We booked $713 million of orders from a large opportunities pop up pipeline, resulting in a 138 times book to sales ratio.
This is especially noteworthy accomplishment considering this is on revenue that's 33% higher than last year.
Orders include long term commercial aviation training agreements with Golar Airlines at Mercer Airlines animal multiyear business Aviation training agreement with deluxe public charter.
We also made excellent progress with our flight operations software solutions with notable agreements, including a five year contract with Ethiopian Airlines for Nexgen crew and operations managers solution suite and since the end of the quarter an agreement with frontier Airlines for our Nexgen operation solutions.
Demand for full flight simulators continue to be strong with 14 sales in the quarter, bringing our year to date total to 43.
Several financial and operational performance was also strong in the third quarter with double digit growth and near record margins we.
We delivered nine full flight simulators in the quarter.
And average training center utilization was 73% up from 60% last year.
Commercial aviation training demand continues to be strongest in the Americas.
Followed by seasonal seasonal uptick in Europe , and then Asia, which is improve would be ongoing easing of travel restrictions in China.
In business Aviation training demand continues to be robust throughout our network, reflecting a high level of pilot training to support business aircraft flight activity, which continues to exceed pre pandemic levels.
In defence the.
The leading indicator of our progress towards our larger and more profitable business is order intake.
This quarter, we booked orders across domains for training and mission support solutions valued at $477 million for a 1.05 times book to sales ratio.
This marks the sixth consecutive quarter that this ratio has been above one resulting in a book to sales ratio of 125 times on a trailing 12 month basis.
Notable orders in the air domain include the provision of a flight training device in maintenance and logistic support for the Royal Canadian Air Force. The CHF 149 core rent search and rescue helicopter the continuation of aircrew training on the KC 135, stretto tanker and C 130 Hercules.
United States Air Force.
And international flight training device upgrades for the F 16 fighter jet and CH 53, heavy lift transport helicopter.
And the land domain, we were awarded funding for our joint terminal control training rehearsal system, which builds on the success of our previous funding awards for a new virtual training capability for soldiers to the U S Army on the soldier virtual trainer prototype contract.
We also booked orders in the space and cyber domains highlighted by the proliferation of fee solutions for distributed network and cyber secure mission training via our U S Air Force Scars program.
And since the end of the quarter, we booked orders in the sea domain with our ongoing work with Lockheed Martin on the Canadian surface combatant ship program.
Defence also continued to build on this foundation of U S Army support with the successful competitive recompete for the U S Army aviation fixed wing flight training program.
Which involves the provision of comprehensive initial and recurrent training for more than 600 U S Army and U S Air Force fixed wing pilots annually at the Sea Dothan training Center in Alabama.
The approximate total value of the base contract and options is $250 million U S with a period of performance through 2032.
This was awarded to us with an effective date commencing our fourth quarter and accordingly will be reflected in our next quarter order intake.
Also involve a U S Army aviation, our prime partner on the U S. Army's future vertical lift Bell helicopter was awarded the flagship program, which will field. The V 280, valor tilt rotor to eventually replace the long serving dual H 60, Black Hawk helicopter.
Pending protest resolution on this award.
We'll support team dollar by delivering a range of train devices solutions in courseware for Bell's family of systems.
We've continued to place a strong focus on our operations and asset optimization in the face of the ongoing macroeconomic challenges impacting the defense industry as well as the broader economy.
And as a result of these efforts our financial performance for defense in the quarter improved sequentially and was largely in line with what we expected.
With that I'll now turn the call over to sign up will provide additional details about our financial performance.
Thank you Mark and good afternoon, everyone.
Holiday did revenue of $1 billion and $23 million was 20% higher compared to the third quarter last year.
Adjusted segment operating income was $160 6 million.
<unk> to $112 7 million in the third quarter last year quarterly adjusted EPS was <unk> 28, compared to <unk> 19 cents in the third quarter last year. Adjusted EPS. This quarter included an approximate <unk> <unk> positive impact as a result of gains on the reversal of impairment of nonfinancial assets following the repurposing and optimization.
We incurred restructuring integration and acquisition costs of $4 $9 million during the quarter relating mostly to the Air Centre acquisition and this also included the $9 8 million impairment reversal.
Net cash provided by operating activities this quarter was $252 $4 million compared to $138 million in the preceding quarter and $309 6 million in the third quarter of fiscal 2022.
Free cash flow was $237 7 million compared to $108 $4 million in the preceding quarter and $282 1 million in the third quarter last year.
The sequential increase was mainly due to a lower investment in noncash working capital and higher cash provided by operating activities, while the decrease compared to the third quarter last year was mainly due to higher investment in noncash working capital, which was partially offset by higher cash provided by operating activities.
Capital expenditures totaled $63 $4 million this quarter with approximately 75% invested in growth to specifically add capacity to our civil global training network to deliver on our long term training contracts in our backlog.
Income tax expense this quarter was $17 $1 million for an effective tax rate of 18%. The income tax rate was impacted by restructuring integration and acquisition costs this quarter and excluding these costs the income tax rate was 19%.
Our net debt position at the end of the quarter was approximately $3 1 billion for a net debt to adjusted EBITDA of $3 seven four times at the end of the quarter. This 43 basis point improvement from last quarter puts us solidly on track to meet our targeted leverage ratio of below three times net debt to adjusted EBITDA by the middle of next year.
Net finance expense this quarter amounted to $48 8 million.
Which is up from $41 $3 million in the preceding quarter and $34 $5 million in the third quarter last year.
Approximately 70% of our debt obligations are fixed rate and the increased finance expense largely reflects the impact of higher interest rates on our variable rate debt instruments.
For now we're assuming our go forward quarterly run rate for this expense in the range of the current quarter.
Now turning to our segmented performance in civil third quarter revenue was up 33% to $517 4 million compared to the third quarter last year and adjusted segment operating income was up 58% to $131 4 million versus the third quarter last year for a margin of 25, 4% our.
Year over year Civil performance was mainly due to higher training and our network utilization and the integration of Air Center into our results, which represented approximately 10% of civil revenue in the quarter.
In defence third quarter revenue of $452 $5 million was up 6% over Q3 last year. Adjusted segment operating income was $25 4 million for the quarter down from $32 million in the third quarter last year. The revenue growth came from FX translation and the higher level of activity on programs, while the lower adjusted <unk>.
Operating income reflects higher costs associated with inflation and supply chain disruptions and labor shortages. This was partially mitigated by a reversal of impairment on intangible assets, following as repurposing and optimization and cost reduction initiatives.
And in healthcare third quarter revenue was $50 4 million up from $32 1 million in Q3 last year, mainly due to the increased sales of patient simulators and center management solutions. Adjusted segment operating income was $3 $8 million in the quarter for an adjusted segment operating income margin of seven 5% compared to a loss.
A $2 7 million in Q3 of last year with that I will ask Marc to discuss the way forward.
Thanks Tanya.
The strength that we saw in the third quarter and gives us additional confidence in both our fiscal 2023 outlook as well as our long term targets.
We're excited about civils prospects as we build on our industry, leading position with the most innovative training in critical operations support solutions, and we expect to see significant growth during and beyond the ongoing global aviation market recovery.
We anticipate continued strong growth in commercial aviation training as flight capacity rises to meet travel demand.
And as mobility restrictions abate in China, which remains a key driver for airlines, mainly operating in Asia Pacific, but also worldwide and.
In business Aviation flight activity has remained above pre pandemic levels and we continue to see strong demand for business aviation pilot training.
We have been and will continue to deploy training capacity in lockstep with demand in this significant segment of the market.
We continue to expect civil performance to be strongest in our fourth quarter with a mixed involving about twice as many full flight simulator deliveries as in the third quarter.
Which gets us to our estimate of 45 plus deliveries for the fiscal year.
We also have more simulators coming online and our global training network, which makes for a larger base of revenue.
We've done very well with full flight simulator sales year to date, and we expect to maintain that momentum winning our fair share.
In defence despite.
Despite the macroeconomic economic headwinds order delays and potential U S budget complexities, which are expected to extend into the next fiscal year.
Our continued sequential growth along with positively trending bookings and backlog renewals.
So our confidence in our multiyear view.
Defense represents a secular growth market for CAE and we believe the sector is in the early stages of an extended up cycle driven by geopolitical realities and increased commitments to defense modernization and readiness.
We're now sustaining higher order intake replenishing and renewing our backlog with new and more profitable defense contracts and we expect this trend to continue and for defense to strengthen over a multiyear period to a low double digit percentage segment operating income margin profile.
We are bidding more and we're bidding larger with a pipeline of multiple $100 million plus programs in a number of $1 billion trust programs that we're bidding over the next three years.
We're highly focused on execution and as we look into the remainder of the current fiscal year. We expect further sequential improvements for defense in the fourth quarter.
And in healthcare, we're on a path to accelerate value creation by gaining share in the simulation and training market and driving top and bottom line growth.
We have a strong team and I expect to see their positive momentum to continue.
Our capital allocation priorities are unchanged. We are focused on organic investments that are made in lock step with customer demand.
We're on track to meeting our leverage target by the Middle next fiscal year, which at that time, we will further increase our financial flexibility.
The <unk> management and board of directors.
Also prior prioritizing returning capital to shareholders in a timely manner, which is a key aspect of our capital allocation strategy.
In summary, the strength of our performance in the quarter and our current expectations for the balance of the year allows us to reiterate our outlook for mid 20% consolidated adjusted segment operating income growth for this fiscal year. We're also reiterating our long term target of a three year.
Our earnings per share compound growth rates in the mid 20% range.
With that I. Thank you for your attention and we're now ready to answer your question.
Operator, we will now take questions from financial analysts.
Certainly thank you and once again on the fall before we began to ask a question compressed a one four by the floor on your top Paul can you Pat.
Turning to its own path towards nausea request.
This question has been answered I can draw your restoration is the one provider.
I will now proceed with our first question on the line from Cornell Gupta with Scotiabank. Please go right ahead with your question.
Thank you Ed and good afternoon, everyone.
Just wanted to ask you on both sides.
Margins are already back to the pre pandemic levels here in the fiscal Q3.
Are you expecting the margins to be nearing the peak or would you expect further upside as Asia comes back.
Well look.
I would say look the others had if I look at this quarter as I said in our remarks, we we had a quite a favorable mix this quarter.
As I've said in the past that it can be an important factor to margins I remember asking that question in Q1, when it was going the other way.
And if I look at that specific address your question and I'll get to it but if we look at next quarter were going to have a lot more full flight simulator deliveries, which played a march will play a role the margins because inherently product sales are although although profitable theyre not as profitable as training so.
We're deploying a lot of training and expect a lot of training in the fourth quarter. So you can expect although we'll still see a very strong performance in civil I Wouldnt expected to see.
High margin in the fourth quarter I would like to be surprised but I don't certainly don't expect it.
But long term look at the end of the day as the market comes back as you said with Asia coming I'm quite encouraged by what I see in Asia Pacific and it's been the longest drag on recovery, where we're continuing to see the positive effects in our travel recovery, we're seeing in terms of utilization of our training centers.
It's going to take some time windows as we saw.
In Europe and America is it takes a while for it to pick up.
I think we're several quarters away from.
Being fully back in my opinion, but make no mistake when I look at fiscal 'twenty five and beyond.
I think we're seeing the pieces here with total recovery taking shape. So if you factor that plus all the cost savings that you are seeing deal flow through our results I think we expect that margins continue to decrease over the long term.
Okay. That's good color market and if you can follow up.
There was a recent announcement I guess by a one off one of the U S Airlines.
Given they are struggling with pilot shortage. They are trying to reduce the number of hours required for <unk>.
Pilots are trained on the turbine engine.
What does that really mean plessey.
Well look I think I'll leave that to the regulators, but everybody is always focused on very much on safety. So.
I would tell you that.
With barely meet.
The demand is out there and we are in growth mode. So to me I don't I.
I don't see that being a factor one way or another to resiliency.
Okay. Appreciate the color. Thank you.
Thank you very much.
Next question on the line is from James <unk> with RBC capital markets. Please go right ahead.
Hey, everyone I hope, everyone is well and congrats on the strong quarter.
Thanks, Jay Thank you.
So on the defense margins in the quarter and some of the long term targets that team established at the Investor Day.
Are you able to help quantify the bridge between those two so I know supply chain kind of unknown at this point and really anyone's guess as to when that improves but are you able to talk to the items that you do have line of sight into over the next few quarters, such as potentially certain low margin business rolling off any.
Any high margin contracts upcoming or specific cost savings related to <unk> cost synergies.
Well I think it's all of the above.
Look as we said before.
What we're doing here is.
We're basically doing very well on order intake you could see like six consecutive quarters now of.
Our book to bills higher than one year of a trailing book to bill over the last 12 months of one to five which points to strong growth.
Poor thing about that is that.
Team, we added with <unk> at the helm is signing contracts that are accretive to our long term goals. So what you see is here is with these order doesn't happen overnight it defensive their products or services products contributing to results faster, but those are contract those new contracts are replacing contracts in our.
Backlog subsequent to that our drag programs that have been very much impacted by the the headwinds that we faced in supply chain. As we've said as you mentioned is on labor.
And in some cases, although we've done very well on order intake and are not orders orders are created equal in terms of our timing.
Yes.
But look we have a pretty good line of sight of those factors. So as we go so thats what allows me to reaffirm.
Not.
For Q4 for sure and then having enough line of sight of how we're doing.
In terms of abatement of those factors to give the optimism that I have for continuous sequential improvement all through next year, along the way to our long term target of double digit growth double digit profitability.
I appreciate that thanks for the color and.
I also wanted to ask a question on civil and the potential impact.
No doubt in Europe , I know pilot training is a regulated and.
Insulated from macro to a certain extent, but can you talk to how your conversations with customers in Europe are evolving given some of the macro headwinds in the region.
Any steps you're team is taking to prepare for a potential slowdown in that region.
Thank you.
Well I think I would tell you is that we.
We're not seeing a slowdown from where we're at today.
And.
Certainly in Europe .
And in the Americas definitely and we are seeing things pick up as I had mentioned in a previous.
Question in Asia Pacific, but at the moment, we're in growth mode.
And we're forecasting being woolworths for at least the conceivable futures so.
So obviously.
With people talk about.
Risk of recession in Europe , It certainly bears watching.
Particularly.
As a result.
Faced with a potential.
Energy crisis, which really hasnt occurred materialized, but look we're watching it but we're certainly not see it and we're not forecasting it anytime soon at least as it also CAE.
Okay I appreciate the color and I'll turn the line over thank you.
Well go to our next question on the line.
From Kevin Chiang with CIBC.
Ed.
Hey, yeah. Thanks, Thanks for taking my question good afternoon, everybody and congrats on a good fiscal Q3 here.
Maybe just on on defense.
Outlook, you mentioned, there's a little bit of uncertainty here with with.
U S government budget appropriation issues.
I was just wondering do you see that primarily impacting.
I guess the timing.
Of awards.
Allocated or does that also impact because I believe you're pursuing some cost recovery initiatives with with.
With the government on just given how inflation thats played out here.
So these appropriate appropriation issues also impact the timing of some of those cost recovery initiatives for you.
So look I would tell him.
The second part of your question Dara on regards to.
This is city point in our recent deal with the budget.
And I would tell you we influence this in no not in any significant way funding was granted specific to address and inflation.
That's public and I can tell you, we're working with our customers.
To address the inflationary items that have been.
Mentioned this on previous calls that have definitely been a factor.
That results in for us submitting requests for equitable whats called <unk>.
Equitable adjustments or <unk>.
Submitted quite a bit in this early in the process. What I can tell you. We have received some small adjustments nothing material I would say.
And so going back to.
Yes.
What I mentioned with regards to the budget being approved in disruptions there.
To me is that we could see.
Prolonged.
<unk> continuous resolution environment defense.
<unk>.
So look that has a potential for delays to new program starts because if youre if youre in that kind of environment. You can have any new program starts so we're watching that.
But I would tell you that.
Even with that factor it may affect the exact timing, but it doesn't change by view with regards to sequential growth next year defense.
Okay, that's fair.
Very helpful.
Maybe my second question here, you've alluded to the past couple of quarters.
Looking to return cash to shareholders and it sounds like.
Like in a position to provide more details in the next fiscal year.
But is there a framework we should be thinking about like are you looking at our targeted payout ratio on the dividend or.
In terms of buyback.
Are you going to return to what Youre doing pre pandemic is there any framework you can share with us or is it still being contemplated at the board level still.
Yes, I think as we said the first priority as it relates to Delever and we saw really good progress in Q3, bringing down the.
The leverage ratio by almost half a turn and continue to be on track kind of guidance. So then we believe we'll be in a better position to consider the return.
Capital to shareholders I think it's too soon to speak about our framework reform at this point.
Okay. That's helpful. Just one last question from me just given the sequential increase in full flight simulator deliveries expected in the fiscal Q4.
Any risks around supply chain or all of the.
Parts of it.
And things that you need to build and deliver those all.
I guess all in house now.
Kind of ready to deliver the cells followed by quarter end here.
While you can never say zero risk because you never know it can hit you with all of those simulators are at customer sites as we speak so theyre built both side of the issue.
So in.
As you know, we're pretty experienced at delivering and certifying full flight simulators. So.
Marketing some factor that.
And clarify almost as an act of God I think pretty good on the on us getting those simulators certified as I said part shortages or not or no longer a factor when you considered about six weeks left in the year.
No. That's super helpful. Thank you very much I congrats again.
And that's by the way I got it I got a shot that out that's thanks to the shout out to the hundreds of people that we have working in customer sites around the world doing that as we speak.
Plaza because they are the heroes, making this happen.
Thank you very much.
Next question on the line comes from.
Cameron <unk> with National Bank Financial go right ahead.
Thanks, Good afternoon.
Wonder if you can just talk a little bit about the progress you're seeing with the air Centre business.
You've sort of indicated a couple of new airline awards here it sounds like you've got.
Some kind of a new <unk>.
Gen solution, there just sort of talk about what the investments required what kind of progress youre, making.
With the with customers on that new solution.
The business I guess has recovered to at this point.
Well look the business is doing.
Actually what we thought it would do maybe even slightly ahead.
At this very moment very very happy with what's happening there I also.
And maybe I'll, let facility after I talk about where we are investments weighted I would say, it's largely in line with what we had anticipated when we announced the acquisition.
Look I'm very excited about this.
I'll talk about it because.
We talked about what our ambitions were.
Okay.
What is an adjacent market for us.
This is playing out this is playing out youll remember that we.
We have an extremely large overlap of customers between our training and simulator business and this flight services business and we're seeing we're continuing to see very very high receptivity of our traditional customers to us being in this market and it comes at a time.
We're seeing look were seeing as airlines ramp up capacity now, it's obviously very challenging times and you can see from our recent evidence that airlines.
In many cases have really outgrown their technology infrastructure and they need to reinvest so you can we will.
Can be well assure that we're engaged with all of our customers to.
To help them as they seek their technology needs of the future you can be sure that so I fully expect that we're going to be part of the solution. Our goal over time, and it's not going to be a near term P&L impact because at the moment, we're focused on integration.
And remember in this kind of business, it's kind of like I'll use the term like an ERP implementations take spirit extended periods of time, but once you have them you have the verdict cedarburg tender as well so look I'm very happy with dilution that next Gen solutions, all about software as a service was versus legacy on premises.
We have a pipeline that pipeline is growing it's going to take time, but I'm very happy about.
Progressing here.
Yeah, and I'll just add on the investments.
To elaborate on Mark.
Seeing the ramp up we're seeing in flow throughs at represents about 10% of civils revenue. This quarter. So that's very good in terms of investment we never laid out the exact amount, but it's in the tens of millions but.
It has started since yes, since the acquisition and as part of the investments that you see actually there was up.
Sure.
Okay.
Great color.
If I could squeeze in a second one just quickly on the defense side.
Canada has formally signed a contract for the F 35 can.
Could you update us on I guess, what your expectation is for the training solution for that.
How do you think you're positioned for that.
Well I think we're well positioned.
Obviously, because I mean thats why we do it we do it around the world Everything every single day, we talked about for example, Sunday of 35, and we won another F 16 contract recently so.
We know how to do this because that will have 18 and majority of fighters out there of the world. So I can tell you I personally and members like chemo and discussions at all levels of government.
In Canada, and with the customers in the United States that we've met with.
The F 35 Joint program Office, who provides management support for the F 35 program.
We're confident that they'd be highly receptive to a proposal by Canada to embed additional training and simulation capacity in Canada as domestic F 35 program and I was encouraged by the fact that when the government announced the F 35 day announced that simulation based training will be done.
<unk> in Cold Lake. So I think it's a natural for foresee to be involved here and look I think this is a generational.
Moment for Canada's National Security.
I think it candidates chosen well in terms of the fighter for men and women in uniform and for Canada's national sovereignty, but medically and jobs and Canadian innovations at stake here.
Canada needs to seize this opportunity of the investment, we're making here and we can't afford to Miss this unique opportunity to create and protect the next generation of aerospace jobs in Canada, the FTE as well, where part of that and I fully expect us to be part of that.
Okay, that's great thanks very much.
Thank you.
Next question on the line is from flattish I'm wondering BMO <unk> ahead.
Good afternoon, Thanks for taking my question.
Mark.
Business aviation flight hours and up being down 5% to 10% this year because of the economy or in the next 12 months I guess.
They're levered within Ta based on kind of the recent acquisitions you've done in your positioning on.
The program too.
It continues to grow in that side of the business.
Absolutely Fabulous the fleet is still growing.
The amount of new pilot demand.
We can.
Trouble media now I can tell you art.
<unk> pilot I could see it myself, but our training centers.
Yes.
One exaggerated we can't find a parking space in the parking space seven days a week.
So I'm not overly concerned about a slight drop in the flight hours I mean, we're seeing a very very hot market for business Aviation training, we're continuing to add capacity or Las Vegas training Center has just come online.
<unk>, Singapore Savannah will be online next year, we have a training at our Orlando opening up as.
A JV partner congressional capital, which is our Sim comp training center opening up in Orlando and I can tell you that we have demands focus for coming into those training centers. So.
I'm not too worried about that drop in flight hours that could occur.
Okay.
That's great color.
Second follow up question is really on defense.
We have six quarters now of expansion and coming down.
The order levels.
And the outlook is positive for that to continue.
When do we start to really experiences.
Kind of a demand momentum into the margin with a greater kind of.
Influence is this more of a fiscal 'twenty five story or a fiscal 'twenty four.
Just trying to understand the trajectory.
How these headwinds from supply chain and it.
Mix in the backlog kind of come off versus returning to a more normal margin in that segment.
Well look it's going to be steady progress.
That's what I see.
These are the headwinds that we see.
Well imagine we're not sitting on our hands deal not doing any of that we're doing something about it but it takes time. It takes time to hire people. It takes time for them in the defense sector to get the proper security clearances that we need for them to be able to execute on some of the programs we have.
This is going to take several quarters to abate.
And it gets but it gets better every quarter, we know what parts we need on the contracts that we have.
But when you need when you get new contracts you need new parts, Okay that we get better at forecasting those things, but it's still an issue because.
The supply chain is not as fast as it once was at the same time, we're factoring potential delays in orders because of things like I talked about the U S defense procurement.
But make no mistake I am seeing steady improvements in our business in terms of we are managing it we have a very happy with.
In terms of the execution of our programs and the level of contingency in those programs that we have execute them well.
As you know there was a factor in Q1 and I mentioned that has not happened 17 years I don't see that happening again now with the rigor that we put into it. So look I expect full when you talk about when do we recover back to low double digits book is going to be where were on that road study and I think that you can see that over the next couple of years.
Get into it.
Okay, great. Thank you.
Thank you very much.
Our next question on the line.
I'm, Tim James with TD Securities go right ahead.
Thanks, and good afternoon. Thank you for taking my question.
First question I guess I, just want to return actually to that last topic Mark I'm. Just wondering if you could comment on or characterize any particular.
Each point in the supply chain that are more problematic than others any any sort of yeah.
No particular parts or aspects of the supply chain that are a little bit more problematic and I'll open it up to either your civil business or your defense business.
Well I think I'd start off by saying it hasn't it hasn't really been a factor on our civil business.
And mainly because we've done a good job over the years to design a product.
He is highly repeatable highly standard and our our teams and global sourcing for example in operations have done a very very good job.
Forecasting.
And being able to obtain those part so I think that that's been the case.
In defense.
The issue is I would say characterize any single part it's basically longer lead times on many parts, which really is a factor here.
Obviously, we've had issues like everybody else has on electronic parts of those kind of things, but today.
It's really the longer lead times repeating myself on inventory many parts and what that does is not only the fact that you missed the part itself is by is the fact that in the meantime, you either can't progress on that contract.
Or you're having to do workarounds and workarounds is inherently inefficient.
Maybe people Bev being idle or our installations, you are having to work around them and therefore, causing delays all of those things caused inefficiencies that weighs down on our margins.
And it has I would say a double effect because traditionally.
We are able to execute contracts and get ahead of ourselves so execute the programs faster and therefore generate efficiencies.
And we're in the contrary situation right now and the same effect with labor you don't necessarily have the the software engineers that you need because of some of the factors I talked about about it all the time to get them to the time at the time to get them basically certified with right clearances. They need now that gets that yet that is getting.
Better because obviously demand in the.
The high Tech market for software engineers.
Specific has cooled so we are a bit of a bit of a benefit of that we're seeing that but it's going to take a few quarters for that to abate.
To the extent that we get back to the margins that we have targeted in our long term.
And our long term defence business.
Okay. That's very helpful. Thank you my second question I'm, just wondering if there are any areas of your your civil business.
On the business aviation side or the commercial side, where you think.
Pricing is particularly strong as we sit here today due to that.
Credible sort of demand conditions, and how quickly air travel has ramped up.
And therefore pockets of pricing that could come under pressure when we get past this.
Very strong ramp up period or do you think as some of the other areas that still remain weak such as China et cetera, maybe sort of make up for any of that potential moderation in pricing or do you not see any kind of particularly strong tracing at this point.
Well I think I'd start by saying that in our civil business.
Part is let's say the training business is long term training contracts and.
And Thats, our specific strategy as you know.
And <unk>.
Typically a fixed percentage or.
CPI based escalators that are built in so.
That has a moderating effect going up and going down right. So you don't really see big spikes.
We have been able to pass on.
The inflationary aspects that we've seen over time when contract renewals come up.
And don't forget our business.
Our vision always bid had always has been and is the way we operate is to delight our customers in it and a corollary to that is we don't gallon them. When the market is going up and then you'll.
You'll be grudge us a fair margin. So I think all of that comes out to say that.
Im quite comfortable.
The outlook that <unk>, given with regards to margins civil going forward.
Okay. Thank you very much.
Thank you.
Thank you our next question on the line.
From Bruno Barton and Theres, All bank capital markets go right ahead.
Hey, good afternoon, everyone.
Just based on your comments on their recovery trajectory for defense margin.
Would it be fair to say that high single digit next year might be a bit too optimistic a mid single digit would be more realistic.
Although I am not going to give us the specifics at this time I'd like to say as I said, we're working through the headwinds that we and that we're going to continue to see improvement going forward on a sequential basis for sure.
Okay, that's great and looking at care capital employed was mostly flat versus last quarter, how should we expect capital employed to evolve or to be deployed going forward for <unk>.
Do you see any fortunately Keith to monetize these assets given the rich valuation and all of this spin off that we've seen a recent remark.
Well look I think in health care, we're focused on translating into great top line success that we're seeing I mean, you look at the revenue this quarter and the which is historical.
It's translating into bottom line I'm sure you've noticed that we're quite happy with that six quarters in a roll up of up.
Pretty strong growth at the topline two consecutive quarters positive as one and we have a great team and I would say we have now Jeff Evans at the helm of the business. He has built a very strong peak.
No exaggeration with the strongest team we've ever had in healthcare and Theyre hard charging they're winning in the market and Thats what were focused on in health care is still funding so.
That's the trajectory that we're on.
Okay, that's great and with respect to Asia Pacific where are you in terms of recovery versus pre pandemic level are you back to halfway through below or above.
Well I would say halfway through it.
Look up how would I characterize it we're in the low 70% utilization in that region approximately right now it does it does have seasonal variations.
I'll give you some maybe data points.
The simulator deliveries.
Our orders typically prior to the pandemic, we typically sell maybe six to eight full flight simulators a year to China.
And I would say over the last couple of years, we've only sold two or three in total.
That gives you an idea in terms of simulator sales.
More near term recovery comes in training and that mainly because we don't have any training centers in China, but it's all the training centers that we have in a region of course, we have a lot of training centers in the region. The anchor customers that we trained in those regions.
A lot of there are a good proportion of their flights are in and out of China, So as that recovers.
We see the utilization in our training centers ramp up I expect that to materialize over the next few quarters as the recovery takes hold.
Okay. Thank you very much for decline.
Okay.
Thank you.
Our next question on the line.
Matthew Li with Canaccord Genuity. Please go right ahead.
Hey, good afternoon, and happy Valentine's day.
On the civil side, when I think about new pilot coming into AB initio training.
Is that a higher margin program and a margin benefit than usual annual pilot training.
And maybe you can quantify kind of the growth youre seeing in AB initio, just given how many pilots need to be trained right now.
It's actually a lower margin.
Business then.
When we look at our mix sits on the lower end.
It's really the.
Look at what that drives it drives.
Yes.
Is increasing capacity in our training center network and as part of our offering to airlines, which is very important airlines are looking for pies, a new pilots and CAE has I think the largest network of pilot training centers in the world.
We don't we don't basically take people off the street that we only do it for airlines themselves. So it's an important part of the offering that we give the airlines as a as a complete solution, but if I take it by itself.
It would be.
If I like lower than the average margins that we get our civil business.
That's very helpful. And then on the defense side, you pointed out the delayed orders coming to fruition as a potential margin driver.
Are those contracts naturally high margin with more product in the mix or is there. Another reason why those orders in particular I pause a different margin.
All of the I would say that I wouldn't say all because sometimes we'll go strategic but the great majority of the contracts that we're signing and we're bidding to date are accretive to our objective of low double digit margins in that business.
Okay.
Okay. That's very helpful I'll pass the line.
Thank you.
And our next question on the line from <unk> with Goldman Brown. Please go right ahead.
If I hear from them.
Thanks, Mark you mentioned that CAE has submitted a request for equitable adjustment.
I'm just wondering if you can comment on the process. For example are there set deadlines for the customer to respond back to you. If it is a negotiated process what happens to the cutoff that though.
Do you have like.
And the ability to appeal the decision.
Well, it's case by case.
It depends what I mean by that sometimes the.
The request for equitable adjustment may be submitted to the government itself and sometimes through an intermediary, which we contract with on behalf of the government. So again case by case.
We do have as you might expect we do have to make our case and a lot of documentation related to that but we have that documentation. We are putting in those cases forward. There is no specific timeline for them to recovery.
As I said, one thing that encourages me very much is and.
As I said previously we had a lot to do with it but Pat herself or our government affairs people in Washington did a very good job on this that in the recent Doj budgets. There is funding specifically granted to address inflation in the industry. So we're working with our customers.
As working to prepare our own claims with regards to the increased budget. So but again there is no. There's no timing on that but I fully expect some of that will come to fruition.
Okay.
Would you described.
Aircrafts are the response has been reasonable or conversations like they haven't been unreal.
No I don't think theres anybody being unreasonable, but you'll have to make your case, but yes. We have made your case, we have simulators.
We're literally.
Delivering across the country in one contract.
About 180 transport trucks.
With armed Guards crossing in United States that were bid that would gas was $2 a gallon or we all know that gas is about $2. A gallon anymore. So you can just imagine that just on that basis alone you say well, let's be fair here, that's not exactly a 2% kind of natural growth in our contract and they are receptive to that that kind of thing.
Okay, and then my second passion backend tier one what are the charges that you took with for our Navy contract I believe it was a sinatra per rep.
Expired as had been extended and if I remember correctly, you are hoping to have it re contracted a better term I'm. Just wondering has that happened hasnt been re contracted on better terms or are you still waiting.
But still waiting on that one and to me, we can't really talk about that that being mandates a contract. This we've submitted the bid that they haven't they haven't they haven't selected anybody as far as I know.
Okay. Okay. Thank you.
Thank you very much and we'll proceed to our next question on the line from Anthony <unk> with Goldman Sachs go right ahead.
Hey, Thanks, so much for taking my question amounts or for an hour today.
I'm looking at the utilization rates and a 73% here in the quarter.
Comparing that back to pre pandemic levels and it looks like you guys are actually up.
So in some cases above.
Where you were.
I'm curious in terms of.
How you guys think through like a capital allocation process of how high that number.
Can go wrong, and we think there needs to be some sort of slack in the system.
And when you get to that number whatever it is how you think through putting new simulators.
To your network, obviously, if that makes sense.
Yes, we will look at the short answer is as we said in our remarks, we deploy capital in lockstep with demand you can well imagine because.
We're the market leader here.
Have been for for a long time, both in simulators and simulator based training, we know the market very well and we know our customers very well and were constant dialogue with them both in.
In the airline sector and our business aviation sector. So we have a pretty good and informed idea of how much demand we will be required because remember.
<unk> regulated market people. There is you can just look at how many flight.
People expect to make the how many deliveries are coming out of the Oems and you will be able to establish what is the demand requirement across the world World approximately.
So so that's how we deploy and we.
In terms of what is the practical capacity look.
I would tell you is our training center in Minneapolis about three weeks ago, where we our anchor customers are some of the.
The largest regional carriers in United States.
Endeavor for example, and I can tell you our training centers are operating above 100% and teams are doing a great job. So we can talk about practical capacity you can get up there you could sustain it when you need to and Thats and believe you me.
To support the training of regional carriers and as states right now they need us to be operating at that level. So we can do it. So there is there is elasticity there now and practical reasons, when we defined 100% for airlines.
Getting a little bit detail here, but that's 6000 hours.
A year, which is 16 hours a day so that's what we consider.
Practical limit, but again, we're doing higher debt. So there's there is flat.
And is there.
What we do and when we get to the kind of levels well guess what in Minneapolis.
There was a bunch of <unk>.
Nice tractor trailers are a backhaul was building two new simulator base are based in Minneapolis, while I was there because clearly demand is there and we secure long term contracts. So we're not speculating about how we deploy that capital.
Okay, Great. That's super helpful. I'm curious how long the lead times are once you decide to add a simulator to a facility how much time does it take for you guys to build that sand and then deliver it to be up and running.
It depends of where it's going.
The big factor, but.
Typically if we make a decision on an airline.
<unk>.
A typical simulator.
Probably when we built before.
Typically between 12 to 14 months I would say.
Okay helpful last one for me on defense, you highlighted our future vertical lift I'm curious and I'm sure you have hundreds if not thousands of contracts, but where does that kind of rank in terms of the large programs that you have and should we be thinking through that.
Contract being negotiated.
<unk> strategy or the new one which is that kind of targeting the double digit percentage margins.
The new one.
Does that answer your question.
Yeah, and then just how in terms of rank.
Hi, Laura sorry versus yes.
It's a large contract.
I said in the I said in the remarks that we have we have lot of contracts that we're bidding and $100 million range that we have a lot of contracts in the $1 billion range over the next three years. This is one of the ones that clarified in the second category of $1 billion.
Without getting specific so it is a large opportunity over time and but it's not the only one so it doesn't disproportionately affect.
My view on the fortunate we will have next year is important but it's definitely not.
The only one.
Awesome. Thank you so much for the time.
Well.
Our next question on the line.
I'm Christine <unk> from Morgan Stanley . Please go right ahead.
Hey, good afternoon, everyone.
Yeah. Good afternoon, just wanted to follow up on pilot shortage at the bigger picture I mean pre COVID-19.
Pilot shortage was already an issue and then the mandatory retirements coming up in the U S.
Please acerbate the issue I mean, when you look at the programs that your customers are undertaking like the AB initio and things like that.
How much of these actions fall like the bigger shortage problem.
And if not what should they be doing.
To support industry growth because it just seems like theres not enough urgency.
In terms of actions they shouldn't be taking so I just wanted to get an idea of how much you think that kind of sort of actions today and if not how do you think that gets resolved.
Look I think it's going to take time, it's going to take investments.
Pilots are not the only issue.
<unk>.
You are facing the industry right now.
It's good.
Been exacerbated by the fact that the.
The industry was extremely finely honed.
Before the pandemic then we went back to so we've met that goal.
And so we've been gradually rebuilding that is for every part of it so pilot.
One part of it that import parts for one we play in and a very big way.
We're doing our part by helping our customers we've been deploying new new to demand in terms of flight flight school activity, we've been signing GOR contract with them. We're operating our training centers that as mentioned in a previous answer at levels that are unheard of at least and certainly the United States right. Now so look I think it's going to take time.
It's going to take investment and that's why I think in terms of our business I think it's going to be.
Good business for a period of time.
I am quite confident the next few years in civil aviation.
Yeah, and thank you for the color. It just seems like Theres no urgency you know.
If I could sneak a second one on well I would tell you.
I would say sorry, Doug I would tell you that if you would tie with some new airline Ceos that I talk to you would feel that urgency of CRT.
But sorry go ahead Christine.
Yeah, great if I could ask another one on M&A.
When you look at what you've acquired over the years part of that was attributed to your success in some of your competitors. Please preceding their territory back to you.
If such opportunities exist out there would you consider levering up the balance sheet, even more today I mean, some of those out are there any assets available for sale that you could.
All day like you've done in the past decade, and if so to what leverage are you comfortable.
So you won't let me.
No seriously.
This seriously Ucs, we're focused on deleveraging right now we don't see any gaps in our portfolio and we did very well during the pandemic to play offense during the downturn.
On slide 10, we I think you've seen that we've done quite a nice job of deleveraging in this quarter I see that continuing along the path that we said that we will get to a level of three.
So look we never pass up the opportunity that would be the two.
Sure.
Good to pass, but I think we've done a good job and that's what we're focused on delivering deleveraging right now looking to start returning cash to shareholders and countries continue to be.
One priority is to continue to grow in lockstep with the demand and thats largely inorganic.
Great well, thank you Mark.
Thank you.
So operator, that's all the time, we have for financial analysts I'd now ask you to open the Q2 members of the media if there are any questions.
Charlie you guys are a reminder for their media if you'd like to ask a question you may do so now by pressing the one by the four on your telephone keypad.
Once again it is there one forward for any questions or comments you may have.
And we do have a question queued up.
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Operator.
If there are no more questions from members of the media I want to thank all participants investors and members of the media mess people crude FCC etcetera.
So it is not at all.
I would like to remind everyone that a transcript of today's call will be posted later today on Cae's website. Thank you.
Yes.
Thank you very much and I'll just conclude the call for today. We thank you for your participation master disconnect your lines.
Good day everyone.
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