CAE Q4 2023 Earnings Call Transcript

Quartr
Provided by Quartr
May 31, 2023

There are 13 speakers on the call.

Operator

Good day, ladies and gentlemen. Welcome to the CAE 4th Quarter and Full Fiscal Year 2023 Conference Call. Please be advised that this call is being recorded.

Speaker 1

I would now like to turn

Speaker 2

the meeting over to Mr. Andrew Arnovitz. Mr. Arnovitz, please proceed.

Operator

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 'twenty four and answers to questions contain forward looking statements. These forward looking statements represent our expectations as of Today, May 31, 2023, and accordingly, are subject to change. Such statements are based on assumptions that may not materialize and are subject to risks Actual results may differ materially, and listeners are cautioned not to place undue reliance on these forward looking statements. A A description of the risks, factors and assumptions that may affect future results is contained in CAE's annual MD and A available on our corporate website in our filings with the Canadian Securities Administrators on SEDAR and the U.

Operator

S. Securities and Exchange Commission on EDGAR. On the call with me this afternoon are Marc Barron, Citi's President and Chief Executive Officer and Sonia Benco, our Chief Financial Officer. After remarks from Mark and Sonia, we'll open the call to questions from financial analysts. At the conclusion of that segment, we'll open the lines to members of the media.

Operator

Let me now turn the call over to Mark.

Speaker 1

Thank you, Andrew, and good afternoon to everyone joining us on the call. I'm pleased with C's accomplishments in fiscal 2023, having C's opportunities to expand our position

Operator

in growing markets with our digitally immersive training and operational support solutions. We did so While navigating through some macroeconomic and legacy related challenges and over the course of the year, we delivered sequentially stronger quarterly results. We had an excellent 4th quarter with over 40% adjusted segment operating income growth, leading to 23% growth for the year as a whole.

Speaker 1

As a testament to quality, we generated strong free cash flow with 120 percent conversion of annual adjusted net income.

Operator

We also expanded our global reach and secured future growth with a record $5,000,000,000 in annual orders for

Speaker 1

a record $10,800,000,000 of adjusted back

Operator

In civil, we launched several new training centers and deployed 23 full flight simulators during the year to our global network to support the major customer outsourcing agreements we secured in the U. S, Europe and Australia and increased pilot train demand across all segments of aviation.

Speaker 1

Exemplifying our more efficient cost structure,

Operator

we eclipsed prior peak civil margins even before the market fully recovers to pre pandemic levels in key regions like Asia. We also booked a record $2,800,000,000 in

Speaker 1

annual civil orders or 1.3x book to sales ratio, demonstrating the sustained high demand for pilot training solutions and our next generation digital flight services. These included comprehensive long term training agreements with airlines and business jet operators worldwide and a

Operator

total of 62 full flight simulator sales for the year.

Speaker 1

We also made excellent progress expanding our

Operator

reach and digital flight services with the ongoing integration of AirCentre, a adoption of

Speaker 1

our next generation solutions by our long standing airline customers. Civil concluded the year with a record adjusted backlog of $5,700,000,000 Among the most more notable developments for CIVIL in the quarter was the announcement of our joint venture with ASEAN, Greece's largest airline.

Operator

New center is expected to begin pilot and cabin crew training by the

Speaker 1

end of

Operator

2023 and will be

Speaker 1

the most advanced flight training hub in Southeastern Europe, powered by Green Energy. Since the end of the quarter, we inaugurated our Las Vegas Business Aviation Training Center, And we announced plans for another new business aviation training facility, this time in Vienna as our base in Central Europe, slated to open in the second half of calendar twenty twenty four.

Operator

4th quarter average training center utilization was strong at 78%, which was up from 69%

Speaker 1

from the same period last year. For the year,

Operator

utilization was 72%, which is up from 60% the year prior. Trading demand in the Middle East was the strongest in the quarter followed by the Americas and Europe.

Speaker 1

Asia has been recovering rapidly since the start of fiscal year with Q4 training center utilization substantially improved in that region. In Business Aviation, training demand was also strong, reflecting a high level of training demand and pilot turnover in that segment. In products, we delivered 17 civil full flight simulators in the quarter and 46 for the year compared to 30 deliveries in the prior year. In defense, we made good progress fueling our multi year transformation with a record $2,000,000,000 of annual adjusted order intake, involving training and simulation solutions for 1 point 1x book to sales ratio. This contributed to a $5,100,000,000 of adjusted defense backlog.

Speaker 1

In the quarter, we had orders totaling $565,000,000 including a U. S. Navy's foreign military sale to Korea for an MH-60R tactical operational flight trainer as well as extensions and expansions with the U. S. Army for fixed wing flight training at the CA Doulton Training Center and with the U.

Speaker 1

S. Air Force for initial flight training at the CA Pueblo Training Center. We also delivered or entered a new agreement for comprehensive training and support services under the Australian Defence Force Assist Program. A few more recent wins since the end of the quarter really serve to underscore the progress that's being made to renew our backlog with larger and more profitable programs. As an example of our continued growth and capabilities In connection with U.

Speaker 1

S. Army Aviation, Defense was awarded a contract to support flight school training support services at Fort Novocel, Alabama. The FSTSS contract is the 2nd the world's largest Helicopter stimulation training program and our US450 $1,000,000 training contract is for training and simulation capabilities that we used to prepare initial entry level and graduate level road towing flight training. By leveraging our expertise from our civil aviation training outsourcing business model, we'll be building and deploying CA owned full flight simulators over the contract term for the CH-47F and UH-60M platforms to meet the U. S.

Speaker 1

Army Aviation Centers of Excellence Rotary Wings Simulation Services requirement. Also, building on our prominent flight training position in Lower Alabama, Defense was competitively awarded the U. S. Air Force's Rotary Wing introductory flight training contract worth a maximum of approximately $111,000,000 over the total contract term. Under the IFR contract, We'll be leveraging our existing training center in Dothan, Alabama.

Speaker 1

Another favorable development that supports future growth was the affirmation in early April of the Bell's B-two eighty Valor in selection for the U. S. Army's Future Long Range Assault Aircraft, OXLLARA. This is noteworthy because CAE is part of Team Valor and is a key partner in the provision of training and simulation solutions for this NextGen platform. These program awards and developments demonstrate our expanded market reach with National Defense Department and OEMs.

Speaker 1

We're able to achieve this by leveraging Defense's enhanced capabilities and scale vertically and by drawing technology, These are prime examples of the kinds of larger and more differentiated programs that will drive the multiyear defense transformation that's currently underway. Turning now to healthcare. We gained share in the simulation market and continued to deliver double digit revenue growth with our dynamic team and highly innovative solutions. Here too, we've been harnessing the power of our 1 CAE mindset with a joint civil and healthcare presentation on parallels between aviation and healthcare training to elevate quality and safety. Our teams recently collaborated at the industry's largest simulation event, the International Meeting of Assimilation in Healthcare, and it's a great demonstration of Key's unique culture.

Speaker 1

Before turning the call over to Sonia, I want to highlight a notable development on the technology application front, which is a real world example of what we mean when we say that we're revolutionizing aviation training in civil and defense markets. We conducted a field study with the Japan Air Self Defense Force to validate the potential for more effective training by leveraging CAE's latest virtual reality and artificial intelligence enabled digital solutions. The study revealed a near full grade of proficiency score improvement across all JSSDF participants. Our innovative training solution incorporated KIA Rise, which we originally conceived for Civil Aviation to provide more effective training to real time objective assessment. It also included Defense These data driven and AI enabled technologies are important building blocks that will drive greater levels of training, efficacy and safety.

Speaker 1

With DC Innovations, we expect to further widen our competitive moat, unlocking a greater share of our addressable markets and developing With that, I'll now turn the call over to Sonya, who will provide a detailed look at our financial performance, and I'll return at the end of the call to comment on our outlook. Sogyal?

Speaker 3

Thank you, Mark, and good afternoon, everyone. Looking at our results on a consolidated basis, revenue of $1,300,000,000 was 32% compared to the Q4 last year. Adjusted segment operating income was $201,900,000 compared to $142,700,000 last year. Quarterly adjusted net income was $110,900,000 or $0.35 per share compared to $0.29 in the Q4 last year. For the year, consolidated revenue was up 25 percent to $4,200,000,000 Adjusted segment operating income was up 23 percent to $548,100,000 and annual adjusted net income was $279,200,000 or $0.88 per share compared to $0.84 last year.

Speaker 3

We incurred restructuring, integration and acquisition costs of $13,300,000 during the quarter related mainly to the integration of our center acquired last year. Net cash provided by operating activities was 180 $108,400,000 from operating activities compared to $418,200,000 last year. We had strong free cash flow in the quarter of 172,000,000 and $335,700,000 for the year for an annual cash conversion rate of 120%. We continue to target an average of 100 percent conversion rate going forward. Uses of cash involved funding capital expenditures for $62,900,000 in the 4th quarter and $268,800,000 for the year, driven mainly by the expansion of our civil aviation training network and lockstep with secured customer demand.

Speaker 3

These opportunities translate to some of our best returns as our simulator's assets ramp up within the 1st 2 years of their deployment With a record order backlog and the large number of agreements we announced over the last year to secure airline outsourcing and training network expansions in commercial and business aviation, we are expecting a higher level of organic growth investment in fiscal 2024. We currently expect total CapEx to be approximately $50,000,000 higher than last year, mainly in support of these accretive investments. Our net debt position at the end of the quarter was $3,000,000,000 for net debt to adjusted EBITDA of 3.4x. This compares to net debt of $3,100,000,000 and 3.7 times net debt to adjusted EBITDA at the end of the preceding quarter. Our leverage ratio has been improving rapidly since the middle of fiscal 2023 and we continue to expect it to be below 3x by mid fiscal 2024, taking into consideration our expanding EBITDA and ongoing funding of accretive organic growth investments.

Speaker 3

Income tax expense this quarter was $33,300,000 representing an effective tax rate of 25% compared to 6% for the Q4 of fiscal 2022. Normalized, the effective tax rate would have been 24% this quarter and 15% in the Q4 last year. On the same basis, the effective tax rate for the year was 22%, which we continue to expect going forward. Net finance expense this quarter amounted to $51,400,000 which is up from $48,800,000 in the preceding quarter and $32,500,000 in the Q4 last year. Consistent with our growth investment priorities and non cash Working capital seasonality patterns for fiscal 2024, we expect quarterly finance expense run rate of approximately $50,000,000 at least for the first half of the Now to briefly recap our segmented performance.

Speaker 3

In Civil, 4th quarter revenue was up 53% year over year to 600 and $1,400,000 and adjusted segment operating income was up 69% year over year to $162,900,000 for a margin of 24.6%. For the year, Civil revenue was up 34% to $2,200,000,000 And adjusted segment operating income was up 54 percent to $485,300,000 for a record annual margin of of 22.4%. The higher revenue for both periods was driven by higher training volumes and a higher number of FFS deliveries compared to the prior year period. We achieved a record margin for the year despite, as Mark referenced, not having fully recovered to 2019 levels in all regions. That's because of the excellent work that was done over the last couple of years to lower our recurring cost base And we're also benefiting from some mix improvements from the structural expansion of business aviation and a greater proportion of revenue coming from training services overall.

Speaker 3

In Defense, 4th quarter revenue of $536,000,000 was up 14% over Q4 last year. Adjusted segment operating income was down 17% over last year to $30,500,000 for an operating margin of 5.7%. For the year, defense revenue was up 15 percent to $1,800,000,000 and adjusted segment operating income was down 55% $53,100,000 representing a margin of 2.9%. Over the course of the year, we had sequentially stronger Quarterly results are the function of execution on legacy contracts, cost mitigations and some gradual improvements in the economic headwinds that we've been facing. And in Healthcare, 4th quarter revenue was $59,100,000 up 12% compared to last year.

Speaker 3

Adjusted segment operating income was $8,500,000 in Adjusted segment operating income was $9,700,000 for a margin of 5%. With that, I'll ask Mark to discuss the way forward.

Speaker 1

Thanks, Sonia. We continue to have a highly positive outlook for fiscal 2020 forward beyond, notwithstanding some of the macro level turbulence in the general economy. We see clearly defined secular trends They're highly favorable across all of CA's business segments. And Civil, we've shown over last year that there's indeed a growing desire by airlines to entrust CAE with their critical training and digital operational support and crew management needs. Demand for air travel continues to thrive And our business is driven primarily by the regulated training required to maintain the pilots and crews who operate the global in service fleet of commercial and business aircraft.

Speaker 1

As an additional secular driver, we expect to sustain high level of pilot movements from the growth and replacement of the active pilot population. According to our estimates, over half the commercial and business jet pilots who will be active in a decade from now, have yet to even begin their training. Given that backdrop, We expect our Civil business to continue growing at above market rate, driven by the remaining stages of cyclical recovery, primarily in Asia, and a sustained high level demand for pilots and pilot training across all segments of civil aviation. In fiscal 2024, We expect lowtomid teen percentage annual growth in Civil adjusted segment operating income generated at the current higher margin level and driven by higher training and product volumes and the ongoing simulator deployments to expand We expect to see a more typical seasonal pattern for train demand this fiscal year weighted more heavily this second half. We also expect about 3 quarters of our approximately 50 annual full flight simulator deliveries to occur in the second half.

Speaker 1

Turning to defense, the sector is already in the early stages of an extended upcycle driven by increased commitments by governments to defense modernization and readiness in support and in response to geopolitical tension. Secular tailwinds that favor our business include increased focus on near peer threats and a greater need for Our defense segment is in the process of a multi year transformation, which we expect to culminate in a substantially bigger and more profitable business. It's already become the world's leading pure play platform independent training and simulation business providing solutions across all 5 domains: air, land, sea, space and cyber. We're uniquely positioned to draw on Steve's innovations in commercial aviation to transform training with the application of advanced analytics and leading edge technology. This to bring potential to capture business around the world accelerated by an expanded capability and customer set.

Speaker 1

Our recent wins and a record adjusted backlog, dollars 9,300,000,000 pipeline of business proposals outstanding and trailing 12 month book to sales ratio demonstrate that our strategy is bearing fruit. In fiscal 2024, We expect events to continue renewing its backlog with larger and more profitable programs, whilst simultaneously working its way through a critical mass of low margin legacy contracts. We're highly focused on execution. And for the fiscal year, We expect defense to drive continued year over year quarterly performance improvements with a heavier weighting to the second half consistent with its historical seasonality. And finally, in healthcare, we see potential to accelerate value creation as we gain share in the healthcare simulation and training market and continue to build on our top and bottom line growth momentum.

Speaker 1

In summary, I continue to be excited about our future. I'm pleased with the important progress that we made last year, expect to continue making Excellent progress in the year ahead and beyond. We're on a clear path to an even bigger, stronger and more profitable CA in the future, And we remain well on track to our targeted 3 year EPS compound growth rate in the mid-twenty percent range. With that, Thank you for your attention, and we're now ready to answer your questions. Thanks, Mark.

Speaker 1

Operator, would you now please open the call to questions from financial analysts.

Speaker 2

Thank Our first question comes from Fadi Chamoun with BMO. Please proceed.

Speaker 4

Thank you. Good afternoon. I have a couple on the defense segment. The 2024 outlook for improving quarterly results year on year, I'm guessing that's based on the $82,000,000 which is corrected for kind of the contract

Operator

write offs in

Speaker 4

the Q1 of last year?

Speaker 1

I'm not I think what I'd tell you about defense, I might be able to let the study pipe in after, but What I'd say, Fady, is look, when I look at defense, there's no doubt we're going to have strong growth in defense in the year. And that's really when we talk about continued year over year improvement Each quarter this year, it's exactly that. We see very good path to that. As you'll recall, I mean, it's all about working through the existing backlog of lower margin legacy contracts that we executed during the time of With still some effects of manpower shortage, parts shortages And delayed orders due to Ukraine. I mean, that's working itself through.

Speaker 1

We're quite a well through it. And at the same time, restilling the backlog with larger, more profitable contracts. It takes phasing, it takes time. We're early in the year. I mean, again, I'm quite confident in that strong growth this year.

Speaker 1

I think as I said many times before in this business, look for the orders. Look at the orders and you see the orders have been strong. We had another year 1.1 book to bill and since the end of the quarter, I can tell you I'm very excited about the contracts that we've announced. And I think one tidbit I'll give you now is that with the recent orders that we won With the Air Force on the IFTR contract, with the U. S.

Speaker 1

Army, with the FTSS contract, which is, as I mentioned, our largest simulation contract in the world for helicopter training with the U. S. Army. No exaggeration. We touched all 43,000 U.

Speaker 1

S. Military pilots at some point in their career. I think it's pretty exciting going forward. So I mean, that's a long line answer. I don't know if you want to add anything.

Speaker 1

So that's it, Fadi.

Speaker 4

Okay. Just maybe a couple of follow-up on this. The EPS CAGR guidance for 2025, in the context that civil growth is now settling in somewhere in that low double digit to mid teens, that implies Defense very significant ramp up in profitability of defense going into 2025 to somewhere near $200,000,000 EBIT contribution. I just want to understand, is this the framework that we are thinking about? And maybe What is the cadence of that improvement?

Speaker 4

Is it more weighted to 2025 when you look at kind of the backlog and how the renewal of the P and L and Overcoming some of these legacy contract margin issues that you have right now, is it more 2025 weighted? Is it kind of more That out in a linear fashion with this improvement going into the next couple of years. And one last point is on the contract you announced yesterday, which is a great contract, congrats on that, by the way. What is the CapEx total CapEx that is required to invest towards that $455,000,000

Speaker 1

revenue that you expect? Okay. I'll start by the first part of that question there. I think that when I look at when I'm basically Going back at every number you said there, it depends look, what we're going to see here, we'll see Again, strong growth in defense. We'll see more revenue improvement towards the second half.

Speaker 1

In terms of margins of defense, we'll start seeing a bigger deflection In the absolute margins themselves as we get into fiscal 'twenty five. That's what we'll see. But inevitably, That's going to support the EPS guidance that we have, as you outlined. With regards to the CapEx on FSTSS, look, we can't go into Too much in terms of the contractual details for a few reasons. Again, we're I'm Extremely excited about that contract.

Speaker 1

I think it's important to note that it's got a similar financial profile For our civil training business, with respect to investment, we'll start to make investments later this year, but It's going to spread over multiple year over the 12 year contract. It kind of looks like an airline training contract. That's what I would tell you at the moment.

Speaker 4

Okay. Thank you. That's helpful.

Speaker 2

Our next question comes from Karnak Gupta with Scotiabank. Please proceed.

Speaker 5

Thanks, operator. Good afternoon, everyone. Just wanted to maybe follow-up quickly on Defense segment. So we saw the continuation of the SOI rebound sequentially in the Q4. But what really kept the margin Intact at 5.7%.

Speaker 5

It wasn't a huge improvement from the previous quarter sequentially. And how do you see that margin,

Speaker 1

Well, as I said, I think we'll get more of a bigger inflection in the actual margin performance, percentage margin As we get closer to the end of this year, the fiscal 'twenty five, what I do see is obviously we're going to see growth year over year in the absolute numbers. So quarter over quarter, year over year, you're going I mean, we'll be margin sale. I would see depreciation. I can't be precise to you because there's a lot of timing to this, I would tell you, timing of ramp up of new programs And wind down of ones we have. So there will be a crossover point, but it would be hard for me to be more precise than that right at this moment in time.

Speaker 5

Right. And what was to my question on the Q4 margin not improving much, was there the same legacy issue still continuing? Or was there any improvement?

Speaker 1

Yes. I mean, it's essentially the same issues. As we said before, there's no surprises. As I said before, There's not going to be. We're continuing executing on the programs that we have.

Speaker 1

And Those are legacy programs that are being gradually replaced with the ones that we see as accretive to the budget objective that we have.

Speaker 5

Okay. Thanks. And just quick follow-up on Civil. So you guys are expecting a pretty decent growth here in fiscal 'twenty four on SOI for Civil, low to mid teen. But you're also saying at the same time, the percentage margin is in fiscal 2024 like Business Jet Training is kind of maybe not growing as fast and the simulator sales are growing.

Speaker 5

And Is there any change we should be mindful of with Spectra mix?

Speaker 1

Well, definitely it's not because Business Aircraft is growing as I can tell you that. Quite confident about that. It's really a question about the ramp up of new simulator deployments. As you saw, we deployed, I think it's 23 full flight simulators last year. We opened up our new training centers, for example, in Las Vegas, very successful.

Speaker 1

But Inevitably, I mean, they create great incremental margin within 2, 3 years, but initially they're low margin as we ramp them up. So, that's really what you're seeing right now. And there's room for margins to go and beyond that, That's for sure. But I think margin 22% range is, I think, in the range that we would expect at the moment.

Speaker 2

Our next question comes from James McGarrigle with RBC Capital Markets. Please proceed.

Speaker 6

Hey, thanks for taking my question. So I just wanted to ask a question on the Civil outlook. Quarter came in great. The fiscal 2024 outlook was very strong as well. But I wanted to ask a question about the longer term strategy, where you potentially see some growth there post 2025?

Speaker 6

And more specifically, on your position in India, What's your position in that country? If you can talk about some of the relationships you have with the country's major airlines? And any color on your strategy there?

Speaker 1

Well, I can tell you, we have a very strong position in India. We have Training centers in multiple locations there, I'm pretty sure that I'm correct in saying that we have strong relationship with every carrier That is in India. Of course, we have a long term partnership with Indigo Airlines there where we provide not only Training for but we pride all of their ab initio cadets and just right there, it goes like 50% of the lift in India, for example. And so I feel very comfortable. And in terms of the long term, look, there's going to be a need for pilots Just to fuel the growth in Civil Aviation, both in whether it be in airline traffic, in business aircraft, For years to come and with the dominant position that we have in this market and the relationships that we have with the World Airlines, I see it has very good growth potential.

Speaker 1

And I put on top of that that I'm very happy What we're seeing is the growth of our flight services business, which remember that there's in our flight service Business, our training business has a huge amount, an over 90% customer overlap. And as airlines seek to modernize their infrastructure, Whether it be on crew management, on flight planning and those kind of infrastructure needs, I think we're invested in that business at the right time.

Speaker 6

I appreciate the color. And just kind of a longer term question on the Defense side as well. One of the things that's come out of the Ukraine war is the need for some common standard, excuse me, which NATO Potentially help set for example, I know you guys don't produce ammunition, but we have British tanks with certain types of guns And they can't fire ammunition for a smooth board German or American tank. But I think this is really highlighting The growing importance of data and weaponry, potentially some open architecture software that could potentially allow some plug and play kits. So Could you just share your thoughts on this opportunities for CAE, if NATO countries potentially move to more common standards and how your business is set up to compete, if that were to be the case?

Speaker 1

Well, I think what I would say at The aggregate level is that we got a long history of supporting Allied Forces and our support is training That's what we do. And when you think about what do militaries do when they're not in operations, they train. That's all they do. They train For conducting our missions and accomplishing what we see as part of our noble mission is making sure that the men and women in uniform are able to execute their missions and return home safely. That's what we do.

Speaker 1

We do it across A host of platforms in aviation, in the Army, on the naval side, in fact, in all five Battle domains. And then maybe to a broader point to your question is that the nature of warfare is a lot more complex. It involves warfare in contested environments, and you need to be able to train In a very realistic matter. And there is no better, more realistic way. The only real way to be able to do it, involving all 5 battle space domains than virtually.

Speaker 1

And for us, being the dominant virtual training provider in the world, I think we are in very good position to support that growth for the years to come.

Speaker 6

Thank you and I will turn the line over.

Speaker 2

Our next question comes from Tim James with TD Securities. Please proceed.

Speaker 7

Thank you very much. Good afternoon, everyone. Maybe a question here for Persona, Just thinking about the investments that the company has been making in intangible assets, and that's been Ramping up with company growth over the last 4 or 5 quarters. I'm just wondering how we should think about the cash requirements for intangibles in fiscal 'twenty four and beyond and sort of what that those investments will be focused on?

Speaker 3

Hey, Tim. So, Deb, we have seen a bit of a ramp up and that was expected. It came along with our commitment to develop on The Civil Flight Services business. As you'll remember, we bought it at quite an interesting multiple knowing that we would develop and take And advance the technology on that front. So that's been the driver and I expect that to be similar this year.

Speaker 7

Okay. My second question, just thinking about it, I'm not sure you can parse it out this way, but let me ask the question. Could you talk about your exposure to regional aircraft training really where I think the pilot shortage It may be most acute or may be most evident. Are you seeing that drive ab initio enrollments or kind Demand throughout your business where you can kind of point specifically to that part of the market?

Speaker 1

Well, I can take it. I mean, I appreciate the question because we're very strong in training Regional airlines, I think we're by far the largest provider of training for regionals In the United States, all of them. And as well, very, very strong on the flight services side. You've seen us just recently, the last few days, Sign a landmark agreement with SkyWest and that was on top of a deal that we signed a few months ago with Frontier, which Not a regional airline, but you gave the point. So look, if I could tell you if I could have another Couple of CRJ simulators ready to now, but put them in right now.

Speaker 1

So the amount of demand is quite unprecedented. And can tell you our training centers supporting regional staff are very busy. And yes, to your point, that is driving activity from an FDO standpoint, Flight training organizations who have an issue.

Speaker 7

Great. Thank you very much.

Speaker 2

Our next question comes from Christine Liwag with Morgan Stanley. Please proceed.

Speaker 8

Hey, thanks. And Mark, maybe going back to Defense and Security Margins, you've been very clear about you've been filling the Defense backlog with more profitable contracts. But can you help us quantify how much of these the composition of the fiscal year 2024 revenue will be? How much of That is from legacy less profitable contracts versus the more profitable ones that you've been booking. Is that 50% more or less?

Speaker 8

That would really help us understand the bridge. And then also any indication for what that looks like for fiscal 'twenty five would be really helpful.

Speaker 1

It's always getting much more in fiscal 'twenty five as we there's some certain programs that we call drag programs that were at 2 good years ago that You know, are at low quite low margin. So, I mean, it's offsetting itself over the next 12 months. Being more precise to you on exactly where does that happen, how much percentage, look, I would hazard a guess at fifty-fifty. And when I say yes, it's a pretty educated guess as I look at that. But I think look at margins start getting towards our target as we get into the Later end of the

Operator

year. Thanks,

Speaker 8

Mark. And if I could ask another one on Civil. Last quarter, You mentioned that the Sabre Air Center was about 10% of Civil revenue. What was it this quarter? And then also how should we think about the margin composition for Air Center versus the overall Civil business?

Speaker 8

Is that accretive or dilutive to the segment margins?

Speaker 3

So I'd say it's around 10% still, Christine, so holding around that. And as we've said before, It's accretive to the Civil margins as well.

Speaker 8

Great. Thanks, Mark. Thanks, Onio.

Speaker 2

Our next question comes from Ron Epstein with Bank of America. Please proceed.

Speaker 9

Hey, good afternoon, guys. Just maybe a bigger picture question looking at the longer term guide.

Operator

How should we think about

Speaker 9

growth? In fiscal 'twenty four, you're looking for mid to low teens growth in the Civil segment, But then the longer term growth for the business you're looking at in the '20s. So does that mean we're seeing that kind of the growth is going to be Rear end loaded. I mean, how should we think about that transition from fiscal 'twenty four to your longer term guide?

Speaker 1

I don't see it back end loaded, Ron. I'm not sure I either right at that conclusion, but we definitely don't see it back end loaded.

Speaker 3

No, it's going to be a progression in margins. We always said in that 3 year guidance that Civil margins would expand, but it's also volume. So with All of these agreements and outsourcings and the additional organic CapEx, it's also it's higher margins on higher volume. So, both. Thank you there.

Speaker 9

That gets you to that kind of mid-twenty growth or wherever, kind of the 20 plus growth?

Operator

Yes. Okay, great. Thank you. That's all. Thank you.

Speaker 2

Our next question comes from Michael Kapros with Desjardins Capital Markets.

Speaker 10

Maybe in defense, the active bids and proposals jumped from $7,300,000,000 to $9,300,000,000 over the last quarter. Maybe just any additional color on that, the bidding pipeline and maybe any delayed expectations related to the current U. S. Budget negotiations

Speaker 1

Look, I'm going to answer the last part of your question. But what I would like to say is that the day that the Chief Defense Business is a proxy to U. S. Government budget, I'll be very happy. Having said that, Look, you can always the only concern that you would have that might speak short term is if something dramatic happens that Yes, stops new orders from happening.

Speaker 1

I don't see that. That was just the timing on short term. To me, the position we have in the market is very, very strong. And we're the backlog that we see in terms The bids outstanding, it's just basically the fact that with our position in the market, we see opportunities to bid a much larger Group of business and that's right in our sweet spot. And we as I've said many times before, we don't prepare bids on U.

Speaker 1

S. Military or any military Okay. Unless we think that we have a pretty good chance to win because preparing those bids is very manpower intensive, it's very labor intensive, it's Honestly, so if we believe if we bid on them is because, as I said, we think the probability of win is high. And that's it's just a reflection of what CA looks like post the L3Harris acquisition, where we've really transformed this business to become the largest the number 2 OEM independent training Provider in the world for simulation. So the scale that we have is really unprecedented and the number of platforms, I mean Aviation platform and platforms of all segments are much higher than they were at any time before.

Speaker 1

And again, all of that contributes to the amount of biz that we can go out after with a reasonable and high level of probability of win.

Speaker 10

Thank you. That's Very helpful. And maybe just a quick one on the flight operating solution contract you signed with SkyWest. There's been some other airlines in the U. S.

Speaker 10

That are Budgeting large budgets for IT overhauls, do you see anything picking up in that space as maybe government Regulation on cancellation service delays increases or is

Speaker 1

it still a steady state as usual? Well, we're seeing a lot of activity and we have a lot of discussions with airlines as they want to renew and modernize their infrastructure. They all have to do it. They all realize that we have in order to keep up with the enhanced demand that there is out there, They are having to modernize their platform. So that's what we're seeing.

Speaker 1

So to me, I see lots of potential for growth In this sector, and we're doing well in it. So I'm quite pleased, as I said, not only the results, where we are in integration and the timing of our investment in Flight Services.

Speaker 11

That's very helpful. Thank you.

Speaker 2

Our next question comes from Noah Popnick with Goldman Sachs. Please proceed.

Speaker 11

Hello, Ron.

Speaker 4

Hi, Noah.

Speaker 11

Mark, you answered to a prior question About the mix of defense this upcoming year, that's high margin programs versus what You call it drag programs and you tossed out fifty-fifty. Are you saying that half of the defense business It is what you call a drag program? Are you saying half of what's been a drag program is gone or is rolling off In 2024?

Speaker 1

No. Definitely not. Our programs are dragged. No, not at all. No.

Speaker 11

So you are saying that half of what's been a drag is rolling off in 2024? Or what does fifty-fifty

Speaker 1

Yes. I think I'm going to bring it back to what the outlook is in defense, Noah, what we're going to see is strong growth in the year defense. We're going to have continued year over year improvement in the amount of SOI that we generate Every quarter relative to the same quarter a year before. And that's we have a very good path on that. And that's why I'm comfortable guiding to that today, even though it's pretty early days In the year.

Speaker 1

And in terms of the margin itself, as new programs come on replacing the other ones that are dragging. And dragging doesn't mean 0 necessarily, just dragging to the marriages that we're Targeting to Duke. So the margin inflection starts happening later in the year and certainly as we begin in fiscal 'twenty five.

Speaker 11

How many programs in defense approximately would you call a drag program at this point?

Speaker 1

I won't get into that Because then I have to define to you what exactly is the drag program. We execute literally probably in the region of 500 or 600 Programs at once in defense at any given time. That's about the number that we have that we're executing at this moment in time. And Maybe leave it at that, Noah.

Speaker 11

Okay. Yes, I mean, It's been asked about a bunch. I don't want to keep asking the same question. But my understanding of what happened there was you acquired a business, Realize there were just a handful of bad contracts written, and that those just need to roll off. And I appreciate the reasons you wouldn't want to get into all of the detail of this on this call.

Speaker 11

But at the same time, the kind of reluctance to give the specifics here, I think Risk is just leaving everybody still confused as to exactly what's going on and when it looks better, Other than just kind of taking the high level word for it. You see what I mean?

Speaker 1

It's such a business we Don't forget that we've been winning contract. We've been executing program both from legacy CAE, whether it be U. S. And international as well as the L3 Harris contract under an environment where we had, just like the rest of the industry, pretty significant Parts shortages, issues, manpower shortages and delays in orders, which we expected to get That were literally delayed because we are focused on the Ukraine war, which in a longer term, obviously drives budgetary pressures higher, Which is a good thing, but in short term, certainly affected the amount of contracts that We're worked on that we can translate into revenue for us as we just got delays in orders. I mean in terms of specific Drag programs, as you might want to think about it, very I mean, very low profitability, that's a very small number of contracts.

Speaker 11

Okay. Okay. That's helpful.

Speaker 1

Thank you.

Speaker 11

The capital expenditure increase this year, What's that for? And then should we be thinking of that as a new base that Then grow off again beyond 2024? Or is there a sort of one time step up this year?

Speaker 1

A lot of it has to do with the success that we've had in convincing airlines to convert more of their training to us. If you look at, for example, 4 out of 4 out of 5 major airlines in the U. S. Are now training with us. That's a big step up.

Speaker 1

And once you do that, I've never seen it go the other way. At the same time, you've seen us Employ new centers for business aircraft, which are highly accretive, very good margin performance in a market which I see a structurally higher going forward. That's really what you're seeing right now. I'm not going to get beyond this year, but that's really a bulk of it.

Speaker 11

Okay, great. Thank you so much.

Operator

Welcome.

Speaker 2

Our next question comes from Fai Lee with Odlum Brown. Please proceed.

Speaker 12

Thank you. Mark, I guess a couple of questions on civil aviation. The utilization rate this quarter was 78%, but Asia hasn't fully recovered. I'm just wondering in terms of how should we be thinking about where The utilization could settle in under a more, I guess, call it normal utilization in Asia?

Speaker 1

Well, I think there's room to grow still in Asia. It has been recovering rapidly since the start of fiscal year and Our Q4 utilization in Asia was certainly substantially approved versus the start of the year. So, there's still room gas in the tank, if I should say, on that one. I mean, utilization is not a perfect number, I would say, because don't forget, as we ramp up New simulators, we've ramped up a lot of simulators that will kind of surface the depressed utilization in short term because Obviously, if the ramping use training center or new simulator up, it's not going to be a full utilization rate off the bat. So, And maybe just Asia Pacific, in terms of China, I would add that, that's mainly a simulator market for us.

Speaker 1

We typically sell maybe 6 to 8 full flight simulators a year to China. Over the last couple of years, we've only 3 in total, but we're definitely seeing a pickup in that sales related activity in China.

Speaker 12

Okay. So in terms of like I know there's some noise on the simulators, but in terms of like utilization rate on a more normalized longer term So is the pot it sounds like the scope for it to go up maybe in the 80s. Is that kind of the way to think about it, maybe mid-80s At maximum or on

Speaker 1

a low line? It certainly can. We're operating at a very high level now if you look at the global At those kind of level, but we have printing centers that operate at north of 100%. Because that's I mean, practically, To operate the whole fleet, the 300 odd simulators at that level, you would not be tenable because you have to have time to maintain them, that kind of thing. But you definitely could see it go up above 78%.

Speaker 1

That's definitely possible. And don't forget, we always work on Making sure that we get the best returns out of utilization we get.

Speaker 12

Okay. And Just a follow-up on in the guidance, you mentioned that Civil is going to continue growing at above market rate. I'm just Curious what I know you gave guidance on the SOI and where you think that's going, but I'm just wondering what is that market rate that you're talking Well,

Speaker 1

we are talking about the underlying rate of growth of mainly airline passenger travel, RPKs.

Speaker 12

Okay. Got it. Thank you.

Speaker 1

Operator, I think that's all done we have For members of the analyst community, we'll now open the line to members of the media if there are any questions

Speaker 2

We have a question from Stephane Rolon from Laplace Canadian. Please proceed.

Speaker 12

Yes. Thank you. I want to

Speaker 1

thank all participants today, financial analysts and members of the media for joining the call.

Speaker 2

That does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your line. Thank you.

Remove Ads
Powered by Quartr
Earnings Conference Call
CAE Q4 2023
00:00 / 00:00
Remove Ads