Q1 2024 CAE Inc Earnings Call
In respect of margin profile, and so in terms of execution or customer quality.
Any background on that please.
Well I think there are Illinois.
First of all that let me just illustrate a little bit. If you think about first of all let me just go back a step to the story, which which I really love and excited about what we're doing in load lower Alabama.
That's b.
Big training basically U S Army for Nova style and right down the road.
Is our training center in Dothan, Alabama so.
I go back to that you know fears ago as you'll remember that 2015, we invested to create a turnkey train facility, where we put.
Our greenfield for literally it was peanuts deal what we set out to put billings. There. We've put simulator, we bought aircraft and we won a contract to train all of the U S Army fixed wing pilots.
Recently this year, we won the Recompete after that up to seven years. So it's good so good for another seven years here, So and then.
And it was a strong win.
So basically accretive to kind of the expectations, we have with regards to margin expectations that we set out there in the market now thinking about what we're doing now the recent contracts that we've won.
Let me start by just the contract because one would I S. T. R. I S.
<unk> is now as the Air Force U S. Air Force now we've won the contract to train all of their rotary wing pilots and we'll be doing that in at our facility adulthood Soak wells imagine now the synergy synergistic benefits of using our existing facilities.
Would it be hangers personnel management, all of that sort of synergy benefits benefit of now throwing more training at the same facade. So that's one example, now think about that the next one I talked about.
Hey, these contract with the U S Army.
A different a contracting authority by the way different customer part of the U S. Army that's exciting in itself, but what we're going to be doing here. This is a.
The training is for a global 6500 business aircraft, where we have done we do the simulators worthy authorized training provider for Bombardier customers of that aircraft.
And so we are basically going to put that we're basically going to put a global 65 simulator and don't fit Alabama.
And.
We are going to be now selling training, okay to the U S Army.
For literally years to come so again, leveraging our assets leveraging what is a commercial simulator.
Built here in Montreal.
You can expect that the kind of margin profile that we've made because we are putting our assets there.
We can derive a better margin because this is a it's basically we are producing we are basically furnishing the assets. So in all of this is more business.
Using this caused by the same assets.
That's very difficult mark. Thanks, so much and then if I can just quickly follow up.
Some of your peers have publicly mentioned about how.
They wanted to kind of move away from from fixed price contracts and defense and obviously you guys have a lot of other guys are trying to cover.
Cover the cost inflation.
Talking to customers any updates on those fronts. How are you positioning on the new contract commitments with respect to fixed price or cost plus.
Well I think the first thing I would tell you is.
Our bid discipline is very stringent and.
There's no secret that and we've talked about it last year that we executed a contract and we still have some at our backlog that were executed at the time there were bid at the time, where that would be a little hyper inflow or quasi hyperinflation part shortage things like that so you can expect that as we bid now, especially the fixed firm price.
<unk>, we're either going to have escalation criteria that protects us for quite a bit and in any scenario or we will basically.
Executed with having so many elements as pass throughs.
Right.
Okay. Thanks, Thanks for the color I appreciate it thank you.
Yeah.
Our next question comes from Noah <unk> with Goldman Sachs. Please proceed.
Hey, good afternoon guys.
Good afternoon.
Mark.
How should we be thinking about the topline growth rate civil can see into the medium term.
You know you've alluded to not having recovered all the pre pandemic and you have some exposure to the geographies that are that have been a little slower to recover.
And then once we kind of click back in to six 7% air traffic growth, you're taking market share.
You're training a lot of new pilots youre growing a software business that's become organic.
I mean do we see multiple years beyond this year of continued double digit organic revenue growth from Stifel.
Well I don't know if I can go out there to say double digit, but I can tell you I see very very good use of years for civil aviation for years to come absolutely.
Okay.
On the margin in the segment I wondered if you could just spend a second on the shape of the year because.
It seems like given the full year target.
The first quarter being the same.
Number the seasonality this year is maybe a little different than in the past is that down sequentially and then higher in the back half or just anything you could share on the shape of the year and the civil margin.
Well look I would tell you that as you said in your question is Q1.
We don't get ahead of ourselves, although you know I am obviously very very pleased with the results that we have are still a busy Q1 as in all of our businesses the way and as all of it yet to repeating again, what I said and you've emphasized again and the question is that.
Or are they more kind of let's call it normal kind of flying activity now.
Now, meaning that you know anybody goes to airports heated right that in airplanes are full flights for full so what youre seeing is you know.
When all the airlines are flying and having trouble meeting the demands for that's out there.
We're seeing less training and that's across our commercial and business aviation in the summer as we always do in a more normal environment. What I would tell you, though is the bookings and as towards the third and fourth quarter are strong and indicative of its going to be another good year, but.
You know I'm not going to get ahead of myself with Q1 here.
Okay.
Thanks, a lot I appreciate it.
Thank you.
Yeah.
Our next question comes from Kevin Chiang with CIBC. Please proceed.
Hi, Good afternoon. Thanks for taking my question, maybe just following up on some of the color you provided there.
Hum once some of these recent defense wins, which which looked to be a highly accretive when you get to leverage some of the fixed assets you already have in place.
That strategically changed how you think about.
I guess, the capital allocation and defense I guess, historically I thought about it being.
More of an asset light.
This where your partner typically put them the capital, but it seems like you're having some wins here, where we're going to deploy capital and how you can leverage those costs.
There's a bit of a change of thinking how you think about deploying capital into this segment.
Not really no I think we've done this before as I'm, saying at the outset of question corner. We deployed a few years ago was our first facility and are in lower Alabama and at that time, we had zero percent market share with the U S. Army today I would tell you we have a very high market share in both rotary and fixed wing cant.
Tracts with the U S. Army. So that's been a very very attractive opportunity will be literally for years and years to come. So we look it depends on the opportunity of what Youre seeing here is really the we use the term I use the term a lot once he and that applies to teamwork, but it also applies to how we go.
Go to market and leveraging our advantages what are being civil on defense or defense on civil So when you think about it really.
If you look at the model and I'll go back to the Heydays model. This.
We're putting a global 6500 simulator and we're selling training to this new part of the U S Army.
We are doing and mark at margin expectations, there that are going to be.
The kind of margins that were more used to win similar so.
Yeah, I think so it doesn't really change anything.
Anything with regards to how we will market depends on the opportunity and I.
But you've seen in civil the kind of incremental returns that we get in training and if we're deploying assets like that for this kind of opportunity expect the kind of the that came the same kind of return profile, which is part and parcel of the outlook that we've given for improving margins in defense you know pretty outlook that we've given.
That's helpful and maybe just my second question, maybe just sticking with defense.
If I go back to the last earnings call you talked about some of these problem contracts and those are both broadening broadening off by the end of this fiscal year, which gave you that.
That visibility to inflect into double digits.
Why margins.
Sometime in fiscal 2020 budget, just an update there in terms of how about runoff is progressing.
That's still the broad timeline, we should be thinking about in terms of margin progression into place this year.
That's true.
Yeah, well I think the first thing I'll talk about I'll emphasize it either one of those contracts that we talked about as being a lower margin profile in some days very little margin. We're talking about a very small number of contracts relatively speaking compared to the hundreds of contracts that we used to do that at any given quarter in defense.
We're steadily closing out that work.
But southern closing out those some.
Some of those programs or advanced.
The progress we've made on those programs in recent quarters again this quarter I would tell you look where we're basically where we thought we would be we expect it to be we're continuing to work.
Through our existing backlog, we're making very good progress.
Plan and and even more importantly, as we answered the previous question, we're winning new profitable business and with the bid discipline and the execution discipline I fully expect to be able to execute those contracts at the margins that we bid them, which again are accretive to margin XP.
Patients that we've communicated and if im looking at the year I mean look it takes time for these to the new contracts to work themselves through so I as we've said before we expect second half.
Performance in defense to step up.
<unk> and margin in absolute levels, though I would expect Q2 to look similar to Q1 and you know it all and in broad terms.
Again, thanks to <unk>.
SAP up and our second quarter end and as we expected as we've communicated a bigger inflection in margins next fiscal year.
Thank you for the color and congrats on a solid start to the fiscal year.
Our next question comes from James Mcgarrigle with RBC capital markets. Please proceed.
Hey, good afternoon, everyone and thanks for taking my question.
Good afternoon.
Yeah. So I just wanted to ask a question on the Civil segment. Then you know kind of the impact on a potential slowdown in the economy I don't pilot training is.
Our regulated and travel demand is extremely strong right now, but you know what.
Recession is be a good indicator of what we could potentially expect.
On the civil side of the business, if the economy potentially slowed or do you think some of those changes.
You've made during the pandemic some of the M&A that you did during the pandemic kind of changed the way you think the civil business would perform any event.
Potential slowdown.
We looked at what else without being a appeared to be pollyanna here.
All eyes scale, there is unmet demand.
And.
I'm not seeing any signs of slowdown in terms of level of trading activity.
In our forecast either in commercial or business aviation training, So I don't want to really heightened b.
It'll be a hypothetical about the future.
<unk>.
Just to give you an anecdotal evidence slipped.
We're ramping up to satisfy the demand as you've seen we deployed I think 23 full flight simulators last year in both civil and while across civil we've opened up new training centers I'm, the CEO and I got anecdotally just doesn't happen everyday but just give you an idea I got two text messages per day during the board meeting.
For people that I know are looking for training slots and obviously, it's a calling means because theres. Many people that have flight departments or whatever they're called me to say it can be I'll be out it's really.
We have slots were filling them.
And.
So I'm not seeing any signs of of.
And Oh, basically slowed down and there are a lot of people out there that I talked to that actually would welcome a little bit but it could catch up.
And then another car.
A follow up by high was on.
How your team is viewing some of the organic opportunities or potentially M&A in the current environment. Obviously, you just had to management very very strongly now and we're seeing that in our results. So it is kind of creating any opportunities for additional organic investment or for M&A as we start to look into fiscal 2025, and you know it.
If so how would you kind of prioritize this investment spend especially given some of the progress you're making on your on your balance sheet targets.
Well look I would tell you that there's maybe a question depends on timing of them right now as we said before our priority has been on deleveraging and we're well on down on the track that we've said two to reach our deleveraging target. This year, we've made excellent progress I'm very happy to see down to three two this quarter.
So I'm pretty confident.
There'll be a risk on us achieving our leverage target of three times a mid year.
That that opens up possibilities for us in terms of capital allocation look I think in terms of M&A I'll say it again.
There's nothing that we need to buy okay. We have everything we have however, if theres opportunities out there. We're always looking obviously, but you don't speak about some of the acquisitions, we've made that would be accretive to the growth that we have consolidated picture.
Not a lot of people that can bring to the amount of synergy that we can bring to an acquisition.
I don't I wouldn't be looking for anything in the short term.
<unk> when we will do is continue to deploy assets in line with the market.
You've seen us do that and again just highlighting what we just said in a previous call.
If you have if you've seen some of the incremental returns that we're making.
Out of both the commercial and business aviation training simulators that we put in the market.
I think I think you would be pleased for us to deliver that capital in.
We said before we don't deploy that capital unless we have long terms contracts to back them up. So look I think look continue to look for a balanced capital allocation approach from us.
Awesome I appreciate you, taking the time and I'll turn the line over thank you.
Yes.
Our next question comes from Tim James with TD Securities. Please proceed.
Thanks, very much good afternoon, everyone.
I'm wondering first mark.
The award the Boeing authorized training provider agreements.
Thank you it seems to me like quite a quite an interesting.
Kind of position to be taking on with Boeing and as we look you know go training into the future I'm. Just wondering if you could talk about what.
That agreement means to CAE and into the future our commercial training in the company's positioning.
Well I think it's great I mean, it looks to me I couldnt be as I said it couldnt be more proud of the partnership we're doing it with Boeing here and what this is about it.
It's about safety, it's about safety and and you couldnt be more proud of the fact that the rate cut.
A company that is Boeing is basically entrusting us to deliver the training.
Their new competency based training curriculum to the airlines of which they sell aircraft, whereas and as this is a contract that is basically an umbrella contract covering covering the world is like well, we're launching in India, and so we'll be delivering the competency base.
Training for Boeing in India, and as you know Theres a lot of airplanes been folded in yet so that's going to be a good business.
Yes, it's about safety here.
This long term training agreement then.
We're very proud of it obviously.
Is it maybe if I can just fall under that question is it about scale for Boeing C, helping them roll out their competency based training to a bigger footprint through through through your assistance or is it a boat Boeing wanting to be aligned with sea because of the safety aspect of it.
Or is it booked.
Look I think it's buoying, recognizing who see is you know while we do see a simulation training training aircrews nobody we do it we'll do it on a $1 2 million hours of training. This year, so well imagine the technology, we bring to bear.
The insights we bring to bear based on just the sheer amount of training that we do yes, you are right part of it it's like yeah. We're levered <unk> installations that we have around the world. So they are basically have.
<unk> is there with simulators, there that we'd get there either there or we can deploy to deliver the three deliberate using your curriculum, but we're able to as well provide objective database insights as to how well for example, the curriculum has been assimilated so that it is.
Around the world.
There's still I can see to be able to make sure that safety remains paramount at attack, we're getting we're basically going to the next level of safety here again, leveraging data and data analytics based insights.
Okay. That's really helpful. And then just my last question.
Rather broad question, but.
I guess I'm thinking more about the civil side of the business I mean, your your competitive position. This is is a it's quite something is very very good.
Are you seeing any changes in the competitive environment. So I mean, the outlook is very strong you're generating good results and momentum is there is it attracting any moves on the competitive front that you're noting are worth calling out.
Don't look I don't see different so I would tell you that for me before I concentrate on customers and meeting our customers' demands across our business what I'm focused on is for Pakistan.
See our metro is not to satisfy customers' delight customers, while we do see is and.
<unk> seen it Eric.
Airlines are much more amenable to our sourcing because we provide them the only real global alter.
Alternative globally based alternative to be able to outsource your train and deliver trading that is.
To the level that it airline would provide leveraged not only a regulatory meeting regulatory requirements or requirements for the airlines themselves their standard operating procedures as an example.
0.2.
The fact that six out of the top seven U S Airlines know R&R training within our network.
Fortunately against burst again zero before the pandemic you've seen us now do.
You would do a deal for training.
In our largest Greek they're training with Qantas I mean, these are marquee airlines that do.
That's the dynamic that we see so the competitive.
To me.
I mean look I don't see any difference in the competitive environment from that standpoint.
Okay. That's great. Thank you very much more.
Yeah.
Our next question comes from Cameron Derksen with National Bank Financial Please proceed.
Thanks. Good afternoon, just a question on the full flight simulator orders are 22 in the quarter, obviously very strong.
I Wonder if you could talk about the outlook for order activity there for the remainder of the year because it does seem like you would be you know I know, it's only one quarter, but pretty much on pace to exceed last year's total which was which was also pretty strong.
It's been a long time since we haven't had a question on the number of full flight similar delivers affect that.
But look I expect it to be elevated look where it got 22, so far.
Well, we're always focused cameras is maintaining our share our leading share then we're not going to take every order if it doesn't make sense.
It has to be accretive to our expectation, but by and large.
Commanding market share that we have it well imagine that it's not a commodity game here, we basically compete on.
The fact that.
Are things are going to be out there for decades, and we're going to be supportive of them because that's what we do so look I would expect that debate.
He made an elevated that's what I said will deliver probably over 50 full flight simulators for the year I'm not going to get ahead of myself with the demand, but I can tell you that the demand is still pretty the demand out there in terms of where we see the market is still pretty high.
Okay. Okay. That's good to hear so just maybe a second question on the future aircrew training contract that had been selected as preferred bidder for.
Obviously, a huge contract over a long period of time, you know assuming that that contract actually gets awarded in 2024 I'm. Just wondering if you could talk a bit about how that kind of scales up I mean does that something where you would start to see workflow in.
Youll fairly quickly after contract award.
Well I think the short answer is yes, okay. It is going to last for quite a long time, it's really we're really talking a generational contract no exaggeration.
I'm pretty darn sure I wish I could tell you I was in Moose jaw, just last Friday, but what our team.
That's going to be a contract that we're going to hire people they spend their whole careers on this contract you'll exaggeration.
I'm very proud of that the fact that we're creating such an opportunity.
So I look I can't go and I think you'd understand another goods as specific as a contract because now we've got to move from being selected to negotiate terms and get get the contract signed so I can't go into detail, but what I would tell you is that it's a meaningful expansion of the work that we do today.
It will start to deliver fairly early because theres a lot of work to be done to prepare.
<unk> Billings you aircraft you are a lot of new things do stimulators.
But I won't get into absolute details right now.
Okay fair enough thanks very much.
Yeah.
Okay.
Our next question comes from Kristine <unk> with Morgan Stanley . Please proceed.
Great Hey, good afternoon guys.
Mark you know that the pilot shortage issue in the industry has been long standing for the past few years now and here. We are it seems like you know theres still tightness in the industry and it could get worse.
Can you get worse, so maybe a three part question and I apologize in advance.
So first.
Far along is the industry in a dropping that I read in the second inning seventh inning are we spring training.
Second.
When you talk to airline customers about their need what's the level of urgency that they had and trying to attract new pilots in the industry versus where they should be if they want to address the problem.
And the third.
A portion of the question would be.
If the industry were to act with appropriate urgency and actions to fully address this issue what does that look like for CAE.
Okay lot of questions here, but yeah look for your question.
Baseball analogy I think we're still in the early innings, we've got some market that's the way I would characterize it.
Lot Theres lots of room lots of time to play this out.
And of course people are focused on the United States, but it's a global situation with different dynamics, depending on where you are.
I can tell you there's lots of urgency amongst your customers out there what are your business aircraft commercial airline customers for sure lots, there's lots of urgency out there.
And for Us.
The airlines are doing a lot to attract and retain pilots you see if you see it everywhere.
And for Us look at.
We're not putting a finer point on it we just put out.
Saying it all our aviation professionals forecast, the Paris Air show and there's going to be a lot of pilot a lot of air cooled auto maintenance technicians going to have D train over the next 10 years and that's our business. That's what we do and we're number one in the world at it so.
I'm bullish almost any almost any scenario.
Yeah.
Great and then in terms of the actions that they take if they actually take those I mean, what does that mean for C. E. D would you need to open up new aviation training facilities like can you size the market and the opportunity is to actually take that action today.
Well, we are doing it I mean, you saw as we I think we launched.
We launched 23, new simulators last year I.
I think we've.
Either launched or open Grau broke ground on eight new simulator centers in the past the past few months. So we're moving and we will continue to move in lock step with them and that's what we've always done and that's what we'll continue to do but again I emphasize that if we're going to deploy that.
Capacity.
We're going to do it with where it's not a question of you know that.
We're going to build it and they will come it will be we could see that demand for years to come and it'll be in the contracts will be based on us being able to.
Support that capacity profitably in line with the expectations that we have for those four.
The pool of segments.
Great. Thank you Mark.
Thank you.
Okay.
Yeah.
Our next question comes from Ron Epstein with Bank of America. Please proceed.
Hi, Good afternoon. This is Jordan on for Robyn.
I just had a question.
About 800 million in unfunded backlog.
Could you guys give a more color on when you expect that funding to come through.
Well when we talk about unfunded backlog you really what you are talking about is that.
I'm sure you know, but it's really if you win lets say you win a seven year contract United States will will only take the first year because that's not funded part of the U S. Government. So we fully expect that the full contract to be realized and I don't think I've ever seen a contract.
Certainly the U S on that definition is gone.
Anywhere but that way.
Ill give you example, we were selected on the F. S TSS contracts actually use contract, where we will be deploying.
You do simulators for the U S Army training and Fort Rucker, our downpour Noelle.
Would you be for us.
It's like $455 million contract without deploy over 12 years, so right now.
We're not where our order intake is not $455 million very small actually.
Very small part of that.
It is in our in our order intake but of course, it would be reflected in unfunded backlog.
Yeah.
Got it. Thank you and then just one quick follow up too on the 8.8 billion that you guys have out for bids and proposals.
What what are you guys.
She is your competitive advantage for those proposals to turn them into wins.
Well I think that's the first thing I would say is that.
We wouldn't fit them. If we didn't think that we have a pretty good shot at winning them because.
If they can defense proposals are there.
There are they're very costly and timely to bid and they require a lot of manpower expertise.
You want to make sure that your expertise your resources are deployed.
On the ones that you think you could win a solar.
So look I think that being sold so we expected when we have a pretty darn good shot so for us beyond that what our advantage as well.
For sure.
The technology the market leadership that we have.
And the fact that you look you look at it.
See in the market, we're really the only pure play platform independent which is important because that makes us objective.
Defense simulation and training company, so that's very attractive in the market out there.
Great. Thank you guys so much.
Thank you.
Our next question comes from Michael <unk> with <unk> capital markets. Please proceed.
Thanks, and good afternoon.
On the Indigo order for 500 820, <unk>. So I don't see any currently has some exposure through the indigo Cadet pilot program, maybe just when should we expect any civil topline or simulator deliveries to be potentially impacted by disorder.
And is it possible that indigo the airline kind of run to run this training to be ready for when the fleet capacity actually starts to be delivered.
Well I think we're very well exposed to that because in.
And the goal isn't we're partner with them to go and we have been partners at the beginning and launch the aircraft.
So it's not only on <unk>, but it's all in all there's simulator based training centers that they do so a very strong exposure and that's what we're very very happy to see.
I see that I mean, indigo will look at they basically carry a 50% of passengers over 50% of the passage of India and they fly to every airport in India.
None of them well, great airline and you know again, it's going to be very good for them, it's going to be very good for us.
Thanks, that's great color and maybe just on the India market in general and maybe some of the potential advantages of that.
The Asia, where China, where you can actually provide.
On premise training as well as the liver.
Yes.
Well, we have a number of training centers in India right now in Bangalore in for two centers in Delhi right off the bat with AB initio operations, there as well so we're well exposed on the ground in India right now.
Perfect that's great and maybe just quickly a quick one on defense.
Margin came in slightly below so essentially at <unk> of last year is that mostly due to seasonality or was there any type of one time costs or other elements that are impacting that.
No it's in line with our expectations.
Well, we said there's one it's a it's certainly not a drop or anything knowledge, where it's basically what I thought it would be as we basically talked about with the margin profile should be this year.
Alright, Thanks, a lot that helps.
Thank you operator, I think that's all the time, we have for financial analysts, we do want to open the lines and the minutes remaining to members of the media. So I'd ask you to please open the queue to the members of the media.
Thank you if you're a part of the press or media. Please press the one four on your telephone.
Okay.
Yeah.
Yeah.
Yeah.
Yeah.
Yeah.
Operator are there questions from the media.
There seems to be no questions at this time.
Okay, well that being the case, we will conclude the conference call I want to thank those participants who joined US today and remind you. They transcripts will later be posted on Cae's website. Thank you all well.
That does conclude the conference call for today, we thank you for your participation and ask that you. Please disconnect. Your line. Thank you.