Q1 2020 Earnings Call
Good day, ladies and gentlemen, and welcome to the C.E. first quarter conference call. Please be advised that this call is being recorded today I would now like to turn the meeting over to Mr., Andrew Arnovitz Mr. Arnovitz. Please go ahead.
Good afternoon, everyone and thank you for joining us today before we begin I'd like to remind you that today's remarks, including management's outlook for fiscal year 2000, and answers to questions contain forward looking statements.
These forward looking statements represent our expectations as of today August 14, 2019, and accordingly are subject to change such statements are based on assumptions that may not materialize and are subject to risks and uncertainties actual results may differ materially and listeners are cautioned not to place undue reliance on these forward looking statements a description of the risks factors and assumptions that may affect future results is contained in seed annual mdna available on our corporate website and in our filings with the Canadian Securities administrators on SEDAR and on the U.S. Security Exchange Commission Edgar site.
On the call with me. This afternoon are Mark policies, President and Chief Executive Officer, and Sonya Branco, Our Chief Financial Officer after remarks from Marc and Sonya will take questions from financial analysts and institutional investors.
Following the conclusion of that Q and a period, we'll open the call to questions from members of the media.
Let me now turn the call over to Mark.
Thank you Andrew and good afternoon to everyone joining us on the call.
I'll first discuss some highlights of the quarter and then Sarnia will really give you the detail financials I'll come back at the end to talk about our outlook.
See had a good start to the fiscal year with double digit revenue and operating income growth and $940 million of orders or a 1.14 book to self.
She is total backlog at quarter was $9.4 billion.
Performance was led by civil which delivered strong operating income growth and continued to add significantly to backlog.
I'm, especially pleased with our market momentum winning the confidence of our airline and business jet customers with our innovative training solutions.
Defense is more variable on a quarterly basis and first quarter results reflect is Tennessee as well as an income growth profile, that's more heavily weighted to the second half of the fiscal year.
And in healthcare the revenue momentum we saw at the end of last year continued into the first quarter.
Looking more closely at civil.
We booked $694 million of orders in Q1.
Including multi year pilot training agreements with airlines, including the tile.
SCS and air Europa.
We also signed five new five year pilot training contract with Philippines, or Asia, which incorporates our highly innovative and data driven CE rise training system.
Civil sold nine full flight simulators during the quarter.
Including three to southwest airline for the Boeing 737 Max.
Want to Korean air for the midpoint for the Airbus Fleet 30, I want to Hawaiian Airlines for the Boeing 77.
Overall training center utilization remained strong at 76% on our network of nearly 300 full flight simulators deployed.
In defense.
We booked orders for $220 million, including contracts with Lockheed Martin for few ones. It's what 30, Jay simulators for the US Air Force and use Us Marine Corps.
Other notable orders include a contract with L. Three miles to continue providing in service support for the Royal Canadian Air Force Cfifteen fleet.
And contracts upgrade the German eurofighter and tornado aircraft simulators.
New Awards also included contracts for Naval training solutions for the Canadian surface Combatant program and upgrades. This Swedish Navy naval warfare training system.
And in healthcare, we continued to pursue larger segments of the healthcare simulation market Wooder expanded salesforce.
We announced a new CE center of excellence for simulation simulation based training at SP Montreal.
Which is an innovative health care education industry partnerships designed to improve patient care.
We also developed and delivered a simulation solutions a medical device company Bayless medical.
To support one of its cardiovascular systems for physicians.
As well, we collaborated with Canadian Association of schools of nursing.
To develop courseware for student nurses practicing what are key Juno Medicare.
With that ill now turn the call over Sonya will provide you a detailed look at our financial performance I'll return at the end of the call to comment on our outlook Sonya.
Thank you Mark and good afternoon, everyone.
Consolidated revenue for the first quarter was $825.6 million up 14% compared to $722 million in the first quarter of last year and segment operating income before specific items was $113.3 million up 15% from $98.5 million last year.
Quarterly net income before specific items of $63.2 million or 24 cents per share was it which is 8% lower than the 26 cents, we reported in the first quarter last year.
Net finance expense for the first quarter was $34.9 million up from $16 million in the first quarter of fiscal 2019, we had higher interest resulting from the long term debt. We issued at the end of last year to fund the acquisition of the Bumbarger bass business as well as we had higher interest on these liabilities it because of the adoption of IRS 16.
Income taxes, this quarter were $13 million, representing an effective tax rate of 17%, which is up from 13% for the first quarter last year.
The higher tax rate was mainly due to the impact of tax audits in Canada last year, partially offset by a change in the mix of income from various jurisdictions.
Cash provided by operating activities this quarter was up 18% to $137.8 million compared to $117.2 million in the first quarter of fiscal 2019.
Free cash flow was negative $102 million in the quarter compared to negative $86 million last year, we had a higher investments related to work in progress inventory for simulator products to be delivered over the balance of the year and we had lower payables.
We usually see a higher investment in noncash working capital accounts in the first half of the year and as in previous years, we expect a portion a noncash working capital investments to reverse in the second half.
Uses of cash in Q1 included funding capital expenditures for $89 million, mainly for growth and specifically to add capacity to our global training network to deliver on the long term exclusive training contracts in our backlog.
We continue to expect total capital expenditures for the year to be modestly higher than the prior by about 10% to 15%.
Other uses of cash include the distribution of $25.5 million in cash dividends and we use another $2 million to repurchase stock at a weighted average price of 30 441 per common share under the MCV program.
Our financial position could you continued to be solid with a net debt of $2.3 billion at the end of the quarter for net debt to total capital ratio of 49.4%. This reflects the issuance of the unsecured senior notes for the members you back business acquisition and the higher usage of cash to fund working capital in the first half of the year.
Since we adopted for 16 effective April Onest 2019 net debt now also includes obligations under these contracts, which were previously accounted for as operating leases and therefore not included in that excluding this impact the net debt to capital ratio would have been 46.3% this quarter.
Return on capital employed before specific items and excluding the impacts of IRS 16 was 12% this quarter a bit lower than the 12.6 last year as we ramp up the large majority of that business acquisition, we continue to target 13% return on capital employed by fiscal 2022.
Now looking at our segment performance and civil first quarter revenue was up 11% year over year to $477.6 million and operating income before specific items was up 29% to 101.
Million dollars.
For a margin of 21.1% from a mix standpoint simulator product deliveries were lower compared to the first quarter last year as we expected while training census growth was especially strong with our expanded capacity on the order front civil book to sales ratio for the quarter was 1.4 times and for the trailing 12 months was 1.54 times.
And the fence first quarter revenue of $320.5 million was up 19% over Q1 of last year, while operating income was down 30% to $15.1 million for an operating margin of 4.7%.
In defense product margins are typically higher than services and the strong revenue growth in the first quarter was skewed to nearly two thirds services and I'd add mainly on new awarded service programs. During the early stages of profitability ramp up.
The lower segment operating income in the first quarter reflects this mix as well as the second half weighted timing of product mouse program milestones, we plan to achieve on the higher margin product contract already in our backlog the mix imbalance in the quarter also reflects some variability in the timing of new product orders. So we expect to conclude during the course of the year.
The defense book to sales ratio was 0.68 times for the quarter and 0.83 times for the last 12 months Lastly in health care, we continued to ramp up scale with the first quarter revenue of $27.5 million, which is 21% higher than the $22.8 million in Q1 of last year healthcare segment operating loss was $2.8 million in the quarter compared to a loss of $1.3 million in Q1 of last year, mainly because of a higher investment in SGN aim to support a larger business with that I will ask Marc to discuss the way forward.
Thanks Sonia.
We continue to see good momentum with our training strategy, which is supported by secular growth trends across all of our markets and underpins sees investment thesis.
Civil market fundamentals remain supportive with long term passenger traffic growth and expanding global in service fleet of aircraft.
Civil Aviation is a highly regulated industry and aviation safety impaired with underscores the criticality of pilot training.
It is also eligible brings to bear the essential role that see plays in helping to maintain the safety of the global Air Transportation system.
We're a pure play aviation training company, that's well defined as an innovation leader.
Our airline customers face evermore complex challenges that we acquire new approaches and comprehensive solutions, we have the largest and broadest global trend network, coupled with market, leading simulation products and support and as we look ahead, we expect to see more airlines outsourcing opportunities materialize from a large pipeline of long term training partnerships.
Which worldwide demand for approximately 300000, new first officers forecast for the next decade.
CA is increasingly the partner of choice offering the industry's most comprehensive cadet to captain training solutions.
And we do this on a global scale.
We're actively taking a leadership role to ensure that our industry has the qualified class it requires.
With women accounting for only 5% of all commercial pilots.
We are determined to drawing the full available talent pool.
Among several other initiatives underway, the CE women and flight scholarship program encourages women to become professional pilot.
We recently announced the launch of a kit at pilot training program, we're seeing will train more than 700, new professional pilots or next next 10 years for southwest Airlines as part of their destination 225 program.
Our collaboration with southwest is yet another great example of our commitment to source train and maintain palace to Fourq support the industry demand over the long term.
For civil overall, we continue to expect operating income to grow in the upper 20% range.
On continued strong demand for our training solutions, including maintaining a leadership leading share a full flight simulator sales and the integration of the first full year of the body business aircraft business.
We expect to complete the integration of this business over the coming quarters.
And we continue to expand our market addressability with the operators of the nearly 5000 bombarding business Jets worldwide.
In defense.
We're continuing to pursue a large market with over $4.2 billion of the best proposals in the hands of customers pending decisions.
Like Civil Aviation Defense forces around the World also faced the challenge of training and maintaining sufficient numbers of critical personnel.
Specifically pilot.
I remain encouraged by the large pipeline of opportunities to support our defense customers and we expect to continue winning our fair share by building on our successes as a training systems integrator.
As in previous years, the full year will be more representative of the defense segment performance.
We continue to expect defense to generate mid to high single digit percentage operating income growth. This year as we delivered from backlog and continue to win orders.
And finally in healthcare I'm pleased that our new products and strengths in front end organizations are bearing fruit and I'm confident that this will continue for the year, we expect double digit percentage growth.
And we remain confident over the long term prospects for healthcare to become a more material part of it.
In summary, we track we remain on track to deliver our fees will follow for the year, we have the benefit of an increasing the recurring base of business in markets with significant headroom for sea to expand its share and we look forward to superior top and bottom line growth in the years ahead.
Before I conclude I want to thank Kate Stephenson, who retired from fees board of directors today, Katy stepping down having reached a 12 year term limit.
During her tenure as a director CEO has transformed itself that becomes the world's largest civil aviation training company.
I also want to welcome Marianne Harrison, who was appointed today has a new senior director Maryann as President and CEO , The John Hancock Life Insurance company and is chartered accountant and fellow of the profession.
She brings a wealth of financial and strategic estimates in a role and we look forward to benefiting for more insight and good governance.
With that I. Thank you for your attention and we're now ready to answer your questions.
Thank you operator, we're now ready to take questions from financial analysts and members of the.
Thank you very much as you would like to register a question. Please press. The one followed by the four on your telephone you will hear rates return prompts to acknowledge your request. If your question has been answered if youd like to withdraw you May press Star one followed by the three once again, ladies and gentlemen for questions. Please press. The one followed by the fourth one moment. Please for the first question.
And our first question is from Kevin Chiang would shed BCS. Please go ahead.
Good afternoon, and thanks, Thanks for taking my question here, but maybe just turn to civil.
I was wondering if were to back up the bombarded training acquisition.
What have organic revenue.
Growth both on the operating income line in the revenue line looks like maybe Conversely, what did that contribute to both those both those line items, both civil revenue and civil operating income if you could share that.
But I think you should try now may be back out, which I assume is the back out the the benefits of the.
Bombarded does have training business I'll start by saying that that business is going very well and the integration if anything's going ahead of plan.
I was quite happy with that and I think when you look at the number as to what we would tell you is that.
Business is performing very well organically training business itself is going.
As we expected despite double digit top and bottom line.
What you when you look at the results that we get asked to bear in mind that in the quarter, we delivered a lot more or less simulators in the quarter, mainly because just because of timing of deliveries with customers. We delivered five in the quarter relative to 12 last year and as you know with the way we account for those we only account for them at delivery. So so I think go ahead question organically the business performed very well.
Okay. That's helpful.
We actually do you have a sense. So is the idea to basically deliver a similar number of simulators for the full year 20 as fiscal 2019.
Yes, yes, yes, okay.
And then.
A bit of a nitpicky question, but utilization.
Was down about four points year over year, just wondering what drove that was it a mix issue because you had folded in the body.
Assets or was there something also played there to drive that for four point.
Decline.
I think that.
The main the main issue that drives that is very costly to utilize this is quite high.
And what you're not seeing there and to your question is because we've deployed.
But from about 260 to 294.
You know in the past year with several of those deployed in the last two quarters. So what you anticipate seeing is the ramp up of Sims that have just been put in their operating low but the network itself is operating very very high utilization.
Okay, that's great color and maybe just more of a clarification point I do not see to him Dennis I apologize if it's there did you provide.
Or the impact of our first 16 have any material impact on the reported EBIT relative to.
Relative to the year over year comp was that I don't think I wonder if you have indeed mdna.
Yes, so Kevin I don't think on on the whole it did not have a material impact on the ancillary assets a little bit of a headwind, but for the year. What we had said last quarter is that we'd have a bit of a headwind of that one cents EPS for the year now in the comparisons year to year I think on the balance sheet is where you see the most impact with the increase on the right of use assets in the <unk> and <unk>.
And the debt, but we've kind of we've given you the metrics adjusted for the IRS 16 elements on the balance sheet.
Perfect Thats. It from me. Thank you for taking my questions. Thank you.
Our next question is from Cameron Doerksen National Bank. Please go ahead.
Yes. Thanks. Good afternoon, just really two quick ones from me Tony You mentioned Youre talking about the working capital investment in Q1. It does seem as though it was it was sort of larger than what we would normally see into Q1 significant working capital investment was there anything unusual in Q1 that would have driven that.
No nothing overly unusual I mean, we always usually see a.
Negative free cash flow investment in working cap in Q1 in fact for each one.
What we what I called out in the remarks was.
A higher level of work in progress simulator. So these are simulators that are going to production tag to clients and given that we had lower deliveries this quarter, hence they didn't turn into revenue and of course. They are in cash flow. We expect those to be delivered over the next few quarters. So really just a question of timing.
Okay, No that's great and just just sort of secondly, I'd just be the X. A modeling question just maybe talking about the depreciation run rate what would the number that we saw in Q1.
Is that actually a good run rate to use kind of on a quarterly basis for the full year.
I think I guess is quite indicative that ultimately you have two factors in there you have the impact of life rest 16, and the added depreciation because the assets are now on balance sheet and of course, the impact of the intangibles from the acquisitions from last year, namely the majority of business jet training acquisition. So I think you can use that as a good run rate.
Okay perfect. That's all for me thanks.
Thanks.
And our next question is from.
Konark Gupta with Scotia Bank. Please go ahead.
Hi, good afternoon, and thanks for taking my questions.
So on the civil side, just wanted to touch base on the margin side.
Can you hear me Okay Andrew.
Yes, we hear you had.
Yes.
So on the civil side, the margins look pretty strong and I guess body acquisition held there. So just wanted to understand this is 21% in Q1, and it's already pretty strong and seasonally you always have second half much stronger.
So what are your expectations around the civil segment margin for the full year, Dan we see something like 20% to 32% is that a possibility overtime.
Well I think I think that it's like when Arne I think what you are seeing it again in the Q1 in terms of margin.
Is the portion thats coming from training, which is higher margin products.
You will remember, saying.
Answering kevin's question that we ought to deliver five simulators in the quarter versus 12 last year.
So although as good margins and price out of goodness as service has training. So I think you're seeing a bit of that.
And I think for the full year I think we continue to just guide you.
Absolute operating income goals, rather than margin nudged up notwithstanding I think margins. We did the only thing I would add to that is.
As we said when we introduced the bombarded business jet training business is that that would have the effect of the 100 to 150 basis points of margin accretion.
Okay Thats, great Im just want to clarify was there any impact of Boeing seven three phone Max in the film segment. Because obviously you did there for grounded and the airlines are not taking deliveries right. Now so is there any reduction in training.
In bags, and maybe as an offset and training other aircraft types.
No not really is not much of an impact for us positive or negative I think in the quarter. The materiality I think we continue to deliver maxims.
I think it will will deliver this quarter.
88, or what how much we think will deliver value that yeah, we'll expect to deliver prop 873 sevens in.
In the next quarter or so we already live delivered a bond so thats not slowing down you saw we sold four Macs simulators in Q1, which is about what you would expect when you considering.
The number of aircraft that have been sold and out order. So loved one of lifestyle really materially affecting our results one way or another right now.
Okay. That's great color and then lastly on defense. So I think there was a note in the Mdna that you had some dilutive impact of fair value revaluation, our share based payments can you clarify what is that and is that nonrecurring in nature or can we expect something in the next quarter as well.
Well, it's not indicative of the continued run rate there was a bit of a timing spike in the quarter because of the appreciation or the the steep appreciation this year.
In the long term incentive plans with gets mark to market with the share price. So there was a bit of a steeper timing on those costs for the quarter.
Okay, Thats, great and the European service programs continue to show weakness I think in the defense side any thoughts there Mark why Europe is next year is that particular program to see our general market weakness.
Well, what do you see your.
On the Mdna, okay well.
I think maybe they were talking about timing on on orders I think the whole situation that you see with guards in why we backed up.
What we said, we said that the year will be backend loaded and we're seeing it.
Yes, when you look at this the what we've done this quarter on our defense you have about two thirds of our revenue in the quarter coming in from services, which has lower margins than programs going through are still in the early stages of profitability ramp ups and we just haven't been able to make the you know the.
The progress in the quarter on certain programs, either because we weren't able to achieve the milestones that we needed to be able to book a good portion of the revenue for a variety of reasons give you one that the aircraft program is is.
It's not a reach their milestones we can't reach ours. So we don't have the information we need whatever.
And lot of times, you don't all you need to do is this the end of the quarter deficit. It moves to the next quarter and some orders that we expected to get would you know were delayed and we're getting into we're getting them. Later, so I think in terms of Europe itself, it's not a European phenomenon its timing.
Okay. Thanks for the color. Thank you.
The only other thing I'll tell you is that.
In terms of backing up or out our optimism on white backend loaded.
Is that of course, we go with the backlog is that we we have a pretty good idea of the when we will be able to do achieve the milestones of which we book revenue and earnings.
And also we need to we always need to win continue to win orders in a year.
Quickly on products, because a part of a portion will materialize in the year, we're pretty confident of that above that because the great majority over 90% of what we need.
To generate from orders that we don't have enough.
In our hands right now we've already been selected so its so its not a question of what do we will win or not it's just the uncertainty of when exactly the training is a contract that we signed so we don't absolute control all of that but we've made some pretty fair assumption that we feel confident about that which which gives us.
Yes, those those two factors give us the confidence.
Haven't done an exhaustive detailed analysis of course of why we feel comfortable with the outlook that we maintain.
Perfect I appreciate it thank you.
And our next question is from Ben one well with digital Bank capital markets. Please go ahead.
Yes, good afternoon.
Just to come back on the defense margins, you seems quite confident that the revenue mix will be more favorable going through the second half could you maybe provide some color with respect to how much of the products revenues are already booked.
In the backlog right now and whether you need still to do to gain a lot of business due to to achieve this milestone.
I don't.
Ill turn over to I don't think we are going to be it will give the model that's in absolute terms, but the confidence comes the confidence comes from what you're saying there. So Colin are is that the amount of the amount of deal and certainly we would have with regard to the products order that we need to get this year.
Is the confidence we get is because were selected were already selected on over 90% of those.
Those orders so we were going to get that business. So the only uncertainty that remains is when you're actually going to sign the contract. So I mean, we're not totally obviously are in control of that rather customers. That's in the hands of the customer as well as ourselves, but the assumptions. We've made are based on very good Intel It will no yes, because these things are near term.
The other thing as well is that doesn't include the fact that Eurs. We haven't missed selected on but we have a very strong backlog or pipeline or I should say I mean, we've got 4.2 billion of proposals are out there that awaiting decision so give or take so some orders that potentially that will win.
I will just add to the confidence that we have a meeting outlook that we have so so those are the reasons. We're we're confident and you know I'll tell you been what we saw this last year and.
We saw this year before as well and the I think that we're kind of at the same same place, except I would say that deal where we have been.
If I just look compared to last year, we're picking up this earlier in the years I think it gives us even more time to materialize the outlook that we have.
Yes, if I just look at.
Yeah and to add to your question on on on how we make it up the order intake, but we have very detailed plan to make up that the advancement on the product programs. During the course of the year, but more weight on the second half, but and given the higher.
Margins of these programs the contribution is disproportionate 10, and we'll make up on the operating income in the margin.
Okay, that's great color and related to the Boeing 737, Max there. There's a lot of discussion on whether there will be a requirement for additional training. So I was wondering if you could maybe provide some color about what would you expect in the next 12 to 24 months and how much.
737, Max and winners do you have in your backlog right now.
Well I think that it will.
We'll have to wait to see what the regulators say one airplanes start.
Coming back when there were clear to fly and in various jurisdictions have we sold to the great majority of the simulators that are out there. We certainly expect to continue to be successful like we have on the rest of our platforms. So I think it's when CF, Mike clearly, there's going to be a lot of training to be done when those when the simulators. When aircraft are cleared so I would see pent up demand there when airlines start to fly.
Data would expect so but I have no color more than anybody else does on what the what the authorities will ultimately decide on what training is done on what simulator.
Okay, that's perfect and the civil Aviation side, Mark you mentioned that you expect more outsourcing in Portuguese with the airline. So are there any particular region, where you expect to see to be more active and in terms of simulators ordered you use you do you still feel confident that you can achieve.
60, plus this year in terms of booking.
Been Ross Andrew actually what we've said as we've said in previous years is that we will maintain a leading share.
I think what I would look to is you know aircraft deliveries which are still.
At a relatively high rate ex the temporary setback and Max deliveries.
In that stimulates a certain level of sustained high level of demand for full flight simulators. So.
What that will precisely be I guess will become clear as the year progresses, but but we see a pretty good run rate. Okay. That's great and Geo care, we saw a nice pickup in revenues.
Margin negative, but I assume its typical seasonal piece or do you still feel confident that the double digit growth can also be achievable on the operating income side.
Yes, absolutely.
Okay great.
Quite it's quite encouraged with the progress that new leader.
Recurring NSN is making with her team and the experiences she brings.
From our senior senior leader leadership or senior levels.
Hi Inn in Philips and other companies. So definitely we're seeing the momentum there and I would expect that to to continue.
Okay. Thank you very much for the time.
And ladies and gentlemen, we welcome your questions. Please press the one followed by the four on your telephone keypad one forward for questions one moment. Please.
Operator, if there are no more questions from members of the financial community will conclude this part of the session open live questions from members of the media.
There are no other questions on the phone lines for participants.
Okay, then well thank all participants for joining us this afternoon and remind you that a transcript of today's call will be made available on SEDAR website at Si Dot com. Thank you.
And ladies and gentlemen that concludes the call for today. We thank you for your participation everyone have a great rest of your day and you may disconnect Your line.