CAE Q1 2024 Earnings Call Transcript

Quartr
Provided by Quartr
August 9, 2023

There are 11 speakers on the call.

Operator

Day, ladies and gentlemen. Welcome to the CAE First Quarter Conference Call. Please be advised that this call is being recorded. I would now like to turn the meeting over to Mr. Andrew Arnovitz.

Operator

You may now proceed, Mr. Arnovitz.

Speaker 1

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 and answers The questions contain forward looking statements. These forward looking statements represent our expectations as of today, August 9, 2023, 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.

Speaker 1

A description of the risk factors and assumptions That may affect future results is contained in CAE's annual MD and A available on our corporate website and in our filings with the Canadian Securities Administrators on SEDAR And the U. S. Securities and Exchange Commission on EDGAR. On the call with me this afternoon is Marc Parran, CAE's President and Chief Executive Officer. Sonia Brancco, our Chief Financial Officer, is unfortunately under the weather today, so I'll be covering off her remarks.

Speaker 1

Also on hand with us is Constantino Malatesta, our Corporate Controller. After remarks from Mark and me, We'll open the call to questions from financial analysts. And at the conclusion of that segment, we'll open the line to members of the media. Let me now turn the call over to Mark.

Speaker 2

Thank you, Andrew, and good afternoon to everyone joining us on the call. We're off to a strong start to the fiscal year with 1st quarter results driven by double digit year over year growth in Civil, Continued strengthening and transformation in defense and increased profitability in healthcare. We made excellent progress to Securys' future growth was over $1,000,000,000 in total order intake for a record $11,200,000,000 backlog. We also further bolstered our financial position and we're on track to meet our leverage targets by mid fiscal year. In Civil, our markets are thriving and we're addressing a greater share of our customers' training and operational needs as evidenced by our long term training services agreements that now include nearly every major U.

Speaker 2

S. Airline. We booked $730,000,000 of orders with customers worldwide for a 1.35 times book to sales ratio, including 22 full flight simulator sales and a range of multi year training contracts in Commercial and Business Aviation. We delivered 6 full flight simulators during the quarter and average training center utilization was 77%, up from 71% last year. As this increase suggests, commercial and business aviation train demand was strong across all regions, particularly if customers get got their required training sessions done ahead of the busy summer travel period.

Speaker 2

While airlines in Asia Pacific are still not yet back to full capacity on international routes, they continue to make rapid progress to restore their operations to 2019 levels and beyond. During a recent Paris Air Show, Several of our airline partners in sizable aircraft orders to be able to execute on their growth plans and we're excited to be in a position to serve their needs over the next several years. Also significant during the air show was our announcement of a strategic alliance with Boeing, whereby CA will become a Boeing authorized training provider and the first to offer its competency based training and assessment curriculum. With this arrangement, Boeing and CA will expand accessibility to high quality, innovative flight training to commercial aviation customers worldwide. We're immensely proud of this collaboration with Boeing, 1st and foremost in our mission to advance safety by bringing forth solutions That will revolutionize the future of training.

Speaker 2

As you can imagine, we welcome any and all opportunities to help advance the industry forward. We also use the occasion of the Paris Air Show to release our 2023 aviation talent forecast, which anticipates the global need for 1,300,000 new aviation professionals to join the industry as pilots, Aircraft maintenance technicians and cabin crew over the next 10 years to support the expected growth of the commercial and business aviation markets. In defense, performance was in line with our expectations and we're making excellent progress to transform our business As particularly demonstrated by our recent large strategic program wins and record $5,400,000,000 defense backlog. These involve larger and more profitable opportunities that we now have the capabilities to bid and win. This quarter, we booked orders across multiple domains for training and mission support solutions with the Funded portion of orders valued at $238,000,000,000 for 0.5 times book to sales.

Speaker 2

Given the large size and number of major program wins in the U. S. This quarter, the unfunded Porsche contracts awarded What's even more significant has more than 3 times the funded portion. In total, these represent an additional $779,000,000 Notable awards include the contracts we announced in May to support FSTSS And the U. S.

Speaker 2

Air Force IFTR contract or initial helicopter flight training out of our existing training center in Dothan, Alabama. Both programs involve delivering simulation and training solutions that are very similar to what we offer in Commercial Aviation, except of course for defense customers instead of airlines. Additionally, Defense was recently awarded a contract in the land domain that is critical to the U. S. Army's mission, namely Phase 2 of their rapid prototyping effort supporting the Soldier Virtual Trainer program for the replacement of 800 plus legacy training systems.

Speaker 2

Since the end of the quarter, Defense has continued to leverage these Dothan Training Center And our industry's leading business aviation training expertise to provide mission critical solutions for the U. S. Army With a contract for simulation based training for the Army's key next generation ISR system called HADES, meaning the high accuracy detection and exploitation system, which is based on the Bombardier Global 6,500 Business Jet, A platform for which we are the global authorized training provider in Civilities. At the end of July, The Government of Canada announced the selection of Skyline, a partnership between CAE and KS Aerospace as the preferred bidder for the Future Air Crew Training Program Or FACT to provide next generation pilot training and aircrew training for the Royal Canadian Air Force. This is a major development for CEE and underscores my excitement for our future in this space.

Speaker 2

We're now entering discussions with the Canadian government and our partners and the award is anticipated in 2024. In context of securing CAE's future growth, we expect the FACT program That will ensure work for CAE over the next quarter century. Turning now to Healthcare. We continue to gain share in the simulation market, We had notable contract awards for our Learning Space Center Management solution for the Thomas F. Frisch Junior College of Medicine in Nashville, Tennessee and And by leveraging our technology and subject matter expertise, Healthcare delivered or entered an agreement with Abbott Laboratories to develop a training program to support the launch of a new commercial pay statement.

Speaker 2

With that, I'll now turn the call over to Andrew, who will provide additional details about our financial performance. Andrew? Thanks, Mark.

Speaker 1

Consolidated revenue of $1,050,000,000 was 13% higher compared to the Q1 last year And adjusted segment operating income was $145,100,000 compared to $60,900,000 in the Q1 last year. Our quarterly adjusted EPS was $0.24 compared to $0.06 in the Q1 last year, which included a $0.07 negative EPS impact The AirCentre acquisition. Net cash from operating activities this quarter was negative $49,300,000 compared to negative $162,600,000 in the Q1 of fiscal 2023. Free cash flow was negative 104,900,000 Compared to negative $182,400,000 in the Q1 last year. The increase was mainly due to higher cash provided by operating activities And a lower investment in non cash working capital.

Speaker 1

Free cash flow performance in the quarter was in line with our expectations and outlook. We usually see a higher investment in non cash working capital accounts in the first half of the fiscal year. And as in previous years, we expect a portion of this to reverse in the second half. And we continue to target 100% conversion of adjusted net income to free cash flow for the year. Capital expenditures totaled $90,600,000 this quarter with approximately 60% invested in growth to specifically add capacity to our civil global training network to deliver on our long term training contracts that are in our backlog.

Speaker 1

Income tax expense this quarter was $8,200,000 for an effective tax rate of 11%. The adjusted effective income tax rate was 13%, which includes a one time favorable impact to income tax expense from a Tax Court decision related to the Sedi program. This, by the way, was offset by a one time negative impact from higher interest expense related to the very same matter. As such, net finance expense this quarter amounted to $54,100,000 which is up from $51,400,000 in the preceding quarter and $36,200,000 in the Q1 last year. The increased finance expense relative to both prior periods mainly reflects the impact of higher interest rates on our variable rate debt instruments and also the aforementioned Tax Board decision.

Speaker 1

Our net debt position at the end of the quarter was approximately $3,200,000,000 for a net debt to adjusted EBITDA of 3.22 times at the end of the quarter. With this continued strengthening of our financial position, we're on track to meet our expected leverage ratio of about 3 times net debt to adjusted EBITDA by the middle of the fiscal year. Now turning to our segmented performance. In Civil, 1st quarter revenue was up 12% to $540,300,000 compared to the Q1 last year and adjusted segment operating income was up 37% to $119,000,000 versus the Q1 last year for a margin of 22%. As we expected, we're seeing the benefit of some mix improvements in the quarter with a greater proportion of revenue coming from training services overall.

Speaker 1

Compared to Q1 last year, we had higher training utilization and increased volume from some of the recently deployed simulators in our network. This was partially offset by lower simulator deliveries, which as we previously indicated in our outlook are profiled more to the back half of the fiscal year. In defense, Q1 performance was in line with our expectations and outlook for the fiscal year. We generated revenue of 471,700,000 which is up 14% over Q1 last year and adjusted segment operating income was $24,300,000 for the quarter, giving us And adjusted segment operating income margin of 5.2%. This compares to a loss of $21,200,000 in the Q1 last year.

Speaker 1

Defense revenue growth stems mainly from a higher level of activity on programs, while the higher adjusted segment operating income reflects the adjustments that we made last year and And in Healthcare, 1st quarter revenue was $42,400,000 up from $39,600,000 in Q1 last year. Adjusted segment operating income was $1,800,000 in the quarter for an adjusted segment operating income margin of 4.2%, which is up quite nicely from Q1 last year.

Speaker 2

With that, I'll ask Mark to discuss the way forward. Thanks, Andrew. Our outlook continues to be bullish for the fiscal year and beyond. We're delivering tangible success in driving strong order flow Our customers in each of our markets have a greater need for innovative training and operational support solutions To succeed in ever more complex environments. And as we look into the period ahead, we continue to be highly encouraged by the secular tailwinds in all segments And the growth that we expect to deliver by harnessing our global market technology leadership and the power of 1 CAE.

Speaker 2

And Sybil, if you've traveled at all over the last few months, you'll know firsthand that demand for air travel is as strong as ever. For the Q1 of this calendar year alone, worldwide passenger traffic increased by 58% compared to last year. And in the United States, the TSA reported a new daily record for passenger screening at the end of June. And yet, not all of our airline customers are back to their 2019 operating levels, specifically in Asia, where international traffic It's still lagging nearly 75% of pre pandemic activity. We see significant demand ahead for air travel in the remainder of the cyclical recovery and beyond.

Speaker 2

We're proud to be the world's largest provider of civil aviation training services, And we're on track this year to deliver approximately 1,200,000 hours of training in our broad global network of training centers. No matter where you fly, chances are that your pilot or first officer has been trained in a flight simulator designed and built by CAE or in one of our training centers around the world. Our highly differentiated solutions in the aviation market, including the most extensive Global training network, world leading simulation products, unique technology and software solutions and strength in training partnerships with operators and OEMs positions us very well for the long term. We expect the pace change in aviation to be substantial over the next few years. The demand for trained aviation professionals is greater than ever and continues to be driven by air traffic growth, Personnel retirements and by the number of new aircraft deliveries.

Speaker 2

Consider the fact that over half the commercial and business pilots We'll be active a decade from now, have yet to even begin their training. These growth dynamics in a highly regulated market, Together with our ability to win a bigger share of our customers' training needs are indeed very significant drivers for CE. Given that context, we expect our Civil business to continue growing at above market rate for the foreseeable future. And in fiscal 2024, we maintain our expectations for low to mid teen percentage annual growth at Civil Adjusted segment operating income. With a higher level of flying activity this summer, especially in Europe, we also continue to expect a more typical seasonal pattern for train demand this fiscal year, Weighed more heavily to the second half.

Speaker 2

Additionally, we still plan for about 3 quarters of our approximately fifty Annual full flight simulator deliveries to occur in the second half. Turning to defense, we expect to continue executing on our multi year transformation, which we expect to culminate in a substantially bigger and more profitable business. As we've shown with the recent FSTSS At Hades wins with the U. S. Army, we're uniquely positioned to leverage a full range of key civil aviation training expertise in the defense market.

Speaker 2

In fact, the solutions that we're providing on these two contracts are very similar to what we deliver to our airline and business jet customers. We're in a very good position with our recent strategic and generational wins, record $5,400,000,000 adjusted backlog, $8,800,000,000 pipeline of bids and proposals outstanding and continued order momentum Committed these are all positive signs of the transformation that is underway. As we look to the remainder of fiscal 2024, We continue to expect Defense to renew its backlog with larger and more profitable programs, while Simultaneously working its way through a critical mass of lower 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 heavier weighting to the second half consistent with its historical seasonality. And in healthcare, Simulation based training is one of the most effective ways to prepare healthcare practitioners for the moments that matter, treating patients, Handling critical situations and enhancing patient safety.

Speaker 2

We're in the path to accelerate value creation by continuing to gain share In summary, I continue to be excited about the future and we're on track to our targeted 3 year EPS compound growth rate in the mid-twenty percent range. I'm very pleased with the important progress we have made in the Q1 and expect this to continue for the fiscal year and beyond. With that, I thank you for your attention, and we're now ready to answer your questions.

Speaker 1

Thanks, Mark. Operator, we'll now open the lines to members

Operator

Our first question comes from Konark Gupta with Scotiabank. Please proceed.

Speaker 3

Thanks, operator. Good afternoon, everyone.

Speaker 2

Yes. Hi. Yes.

Speaker 3

Good afternoon. Just first question On the defense contracts, Mark, you mentioned about a couple of these big wins recently. They had very similar Attributes to airline training contracts. Can you explain us what the similarities are? Is it in respect of Margin profiles in terms of execution or customer quality, any background on that, please?

Speaker 2

Well, I think there are elements 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 I really love and excited about is what we're doing in Lower Alabama. That's big training base for the U. S.

Speaker 2

Army Headquarters for Nova Southern right down the road is our training center in Dothan, Alabama. So I go back to that, a few years ago, as you remember, the 2015, we invested to create a turnkey training facility where we put Greenfield was literally was a penis deal when we set up. We put buildings there. We put simulators. We bought aircraft And we won the contract to train all the U.

Speaker 2

S. Army's fixed wing pilots. Recently, this year, we won the recompete After 7 years, that's good. So we're good for another 7 years there. So and then and it was a strong So basically accretive to kind of the expectations we have with regards to margin expectations that we've set out there in the market.

Speaker 2

Now Think about what we're doing now, the recent contracts that we've won, let me start by just the contract that we won with IFTR. IFRS is now with the Air Force, U. S. Air Force now. We've won the contract to train all of their rotor weaving pilots And we'll be doing that in at our facility at Dothan.

Speaker 2

So as well as imagine now the synergistic benefits of using our existing facilities, Whether it be hangers, personnel, management, all that, so the synergic benefit of now throwing More training at the same facility. So that's one example. Now think about the next one I talked about, Hades contract with the U. S. Army, a different Contracting authority by the way, different customer, part of the U.

Speaker 2

S. Army, that's exciting in itself. But what we're going to be doing here, this is a The training is for Global 6,500 Business Aircraft where we've done we do the simulators. We're the authorized training provider for Bombardier customers of that aircraft. And so we are basically going to We're basically going to put a Global 65 simulator in Dothan, Alabama and We are going to be now selling training, okay, to the U.

Speaker 2

S. Army for Literally years to come. So again, leveraging our assets, leveraging what is a commercial simulator built here in Montreal. And you can expect that the kind of margin profile that we met, because we are putting our assets there That we can derive a better margin because this is a it's basically we are basically furnishing the assets. So in all of this, it's more business using this quasi same asset.

Speaker 3

That's very good color, Mark. Thanks so much. And then if I can just quickly follow-up. Some of your peers have publicly mentioned about How do you want to kind of move away from fixed price contract and defense? And obviously, you guys and a lot of other guys are Trying to cover the cost inflation and talking to customers.

Speaker 3

Any updates on those How are you positioning on the new contract events with respect to firm fixed price or cost plus?

Speaker 2

Well, I think the first thing I'd tell you is, our bid discipline is very stringent. And we There's no secret that we talked about in the past year that we executed contracts and we still have some of our backlog That we're executed at the time that we're bid at the time where that would be a little hyper inflow or quasi hyper inflection, part shortage, things like that. So you can expect that as we bid now, especially in a fixed firm price contract, we're either going to have escalation criteria That protects us for quite any scenario or we will basically execute it with having so many elements as pass

Speaker 3

throughs. Okay. Thanks for the color. I appreciate it. Thank you.

Operator

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

Speaker 4

Hey, good afternoon, guys.

Speaker 1

Good afternoon, Noah.

Speaker 4

Mark, how should we be thinking about the top line growth rate Civil can see into the medium term? You've alluded to not having yet recovered all the pre pandemic and you have some exposure to geographies that have been a little Slower to recover. And then once we kind of click back into 6%, 7% air traffic growth, you're taking market share, You're training a lot of new pilots. You're 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 Civil?

Speaker 2

Well, I don't know if I can go out there and say double digit, but I can tell you I see very, very good use years for civil aviation for years to come. Absolutely.

Speaker 4

Okay. On the margin in the segment, I wondered if you could just spend a 2nd on the shape of the year because it seems like given the full year target and the Q1 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 in the Civil margin?

Speaker 2

Well, look, I tell you that as you said in your question, it's Q1. So we'll get ahead of ourselves. Although, I'm obviously very pleased with the results that we have in our civil business in Q1 as in all of our businesses. And look, To repeating again what I said and you've emphasized again in the question though is that we're then more kind of Let's call it normal kind of flying activity now meaning that anybody goes to the airport sees it, right, that airplanes are Full and flights are full. So what you're seeing is when all the airlines are flying and having trouble meeting the demand that's out there, We're seeing less training and that's across commercial and business aviation in the summer as we always do in a more normal environment.

Speaker 2

What I would tell you though is the bookings towards the 3rd Q4 are strong And indicative of it's going to be another good year, but I'm not going to get ahead of myself to chew on here.

Speaker 4

Okay. Thanks a lot. I appreciate it.

Speaker 2

Thank you. Thank you.

Operator

Our next question comes from Kevin Chiang with CIBC. Please proceed.

Speaker 5

Hi, good afternoon. Thanks for taking my question. Maybe just following up on some of the color you provided, Konark there On some of these recent defense wins, which look to be highly accretive, you get to leverage Some of the fixed assets you already have in place, does that strategically change how you think about, I guess the capital allocation in defense, I guess historically I thought of that as being more of an asset light business where your partner typically puts in the capital, but it seems like you're having some wins here where you deploy capital and now you can leverage those fixed costs. Is there a bit of a change in between how you think about deploying capital into this segment?

Speaker 2

Not really. No, I think we've done this before. As I was saying at the outset of the question Konark, we deployed a few years ago our first facility in lower Alabama. And at that time, we had 0% market share with the U. S.

Speaker 2

Army. Today, I would tell you we have a very high market share in Both for order rate and fixed wing contracts with the U. S. Army. So that's been a very, very attractive opportunity.

Speaker 2

It will be literally for years years to come. So we look, it depends on the opportunity. What you're seeing here is really the we use the term and I use the term a lot, 1CE. That applies to teamwork, but it also applies to how we go to market in leveraging our advantages, whether it be in civil On defense or defense on civil. So, when you think about it really, if you look at the model and go back to the Hades model, This is where we're putting a Global 6,500 simulator and we're selling training to this new part of the U.

Speaker 2

S. Army. We're doing, Mark, at margin expectations there that are going to be the kind of margins that we're More used to in Civil. So I think so it doesn't really change anything with regards to how we will market depends on the opportunity. And I mean 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 same kind of return profile, which is part and parcel of the outlook that we've given for improving margins in defense for the outlook that we've given.

Speaker 5

That's helpful. And maybe just my second question, maybe just sticking with defense. I think if I go back to your last earnings call, you talked about some of these problem contracts and those broadly running off by the end of this fiscal year, which gave you that visibility to inflect into double digit SOI margins maybe sometime in fiscal 2025. Just an update there in terms of how that runoff is progressing. Is that still the broad timeline we should Thinking about in terms of margin progression in defense this year and into next year?

Speaker 2

Yes. Well, I think the first thing I'll talk about or emphasize is Those contracts that we talked about as being lower margin profile, in some case very low margin, we're talking about a very small number of contracts, Relatively speaking, compared to the hundreds of contracts that we executed at any given quarter in defense and we're steadily closing out that work. We have been steadily closing out some of those programs or advance the progress we've made on those programs in recent quarters, again this quarter. I would tell you, look, we're basically where we thought we would be and we're expected to be. We're continuing to work through our existing backlog.

Speaker 2

We're making Very good progress as planned. And even more importantly, as we've answered in 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 at which we bid them, which again are accretive to margin expectations that we've communicated. And if I'm looking at the year, I mean, look, it takes time for these new contracts to work themselves through. So as we've said before, we expect second half performance in defense to step up both in margin and absolute levels. So I would expect Q2 to look similar to Q1 and In broad terms, it's again, it makes a step up in the second quarter.

Speaker 2

And as we expected, as we've communicated, bigger

Speaker 5

Thank you for the color. Congrats on a solid start to the fiscal year

Operator

Our next question comes from James McGarigle with RBC Capital Markets, please proceed.

Speaker 6

Hey, good afternoon, everyone, and thanks for taking my question.

Speaker 3

Good afternoon.

Speaker 6

Yes. So I just wanted to ask a question on the civil segment and kind of the impact on potential slowdown in the economy. I know pilot training is Regulated and travel demand is extremely strong right now. But would past recessions be a good indicator of what we could potentially expect On the Civil side of the business, if the economy potentially slowed, how do you think some of those changes that you've made during the pandemic, Some of the M and A that you did during the pandemic kind of changes the way you think the Civil business will perform in the event of a potential slowdown?

Speaker 2

Well, look, without being appeared to be Pollyanna here, all I see out there is unmet demand. And I'm not seeing any slight of slowdown in terms of level of training activity in our forecast Either in commercial or business aviation training. So I don't want to really be hypothetic about the future. Look, I'll just give you an anecdotal evidence. Look, we're ramping up to satisfy the demand.

Speaker 2

As We deployed I think 23 full flight simulators last year in both civil and well across civil. We've opened up new training centers. I'm the CEO and I got anecdotally, this doesn't happen every day, but just to give you an idea, I got 2 text messages today During Board meeting, for people that I know looking for training slots and obviously, if they're calling me, it's because they're seeing people that have departments or whatever are calling me to say, can you help me out? It's really if we have slots, we're filling them. And So I'm not seeing any signs of I mean, I'll basically slow down and There are a lot of people out there that I talk to that actually would welcome a little bit so they could catch up.

Speaker 6

And then another A follow-up I had was on how your team is viewing some of the organic opportunities or potentially M and A In the current environment, obviously, you just had demand to be very, very strongly now. We're seeing that in the results. So is this kind of creating any opportunities For additional organic investment or for M and A, as we start to look into fiscal 2025? And if so, how would you Kind of prioritize this investment spend, especially given some of the progress you're making on your balance sheet targets.

Speaker 2

Well, look, I would tell you that there's maybe a question depends on timing. And right now, as we said before, our priority has been on deleveraging. And we're well down on the track that we've said to reach our deleveraging target this year. We've made excellent progress. Very happy to see down to 3.2 this quarter.

Speaker 2

And so I'm pretty confident no big risk on us achieving our leverage Targeted 3 times mid year. So look, that opens up possibilities for us in terms of capital allocation. Look, I think in terms of M and A, I'll say it again. There's nothing that we need to buy, okay? We have everything we have.

Speaker 2

However, if there's opportunities out there, We are always looking obviously, but you don't speak about some of the acquisitions that we made that would be accretive to the growth that we have, consolidate our picture. I mean, there's not a lot of people that can bring the amount of synergy that we can bring to an acquisition. I wouldn't be looking for anything in the short term. I mean, what we will do is continue to deploy assets in line with the market. You've seen us do that.

Speaker 2

And Again, just highlighting what we just said in the 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 you would be Pleased for us to deliver that capital. And as we said before, we don't deploy that capital unless we have long term Contracts to back them up. So look, I think we'll continue to look for a balanced capital allocation approach from us.

Speaker 6

Awesome. I appreciate taking the time and I'll turn the line over. Thank you.

Operator

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

Speaker 7

Thanks very much. Good afternoon, everyone. Wondering first, Mark, the award, the Boeing authorized training provider agreement, I think it seems to me like quite an interesting kind of position to be taking on with Boeing and as we look About training into the future, I'm just wondering if you could talk about what that agreement means to CAE and into the future of commercial training and the company's positioning.

Speaker 2

Well, I think it's great. I mean, look, to me, I couldn't be as I said, I couldn't be more proud On the partnership we're doing with Boeing here and what this is about, it's about safety. It's about safety. And you couldn't be more proud of the fact that The great 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 was and this is a contract that It's basically an umbrella contract covering the world if like, but we're launching in India. And so we'll be delivering the competency based training for Boeing in India.

Speaker 2

And as you know, there's a lot of airplanes been sold in India. So that's going to be a good business. So, again, it's about safety here, the long term training agreement and We are very proud of it, obviously.

Speaker 7

Maybe if I could just follow on to that question. Is it about Scale for Boeing, see helping them roll out their competency based training to a bigger footprint through your assistance? Or is it about Boeing wanting to be aligned with CE because of the safety aspect of it or is it both?

Speaker 2

Look, I think it's Boeing recognizing who CAE is. What we do at CAE Assimilation training aircraft. We'll do a 1,200,000 hours of training This year, so you can well imagine that the technology we bring to bear, the insights we bring to bear based on just the sheer amount of Train that we do. You're right. Part of it is like, yes, we're leveraging installations that we have around the world.

Speaker 2

So they basically have Facilities there with simulators there that we get that are either there or we can deploy to deliver the trade delivered using our 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 around the world, There's so I can see to be able to make sure that safety remains paramount. And in fact, We're getting we're basically going to the next level of safety here, again, leveraging data and data analytics based insights.

Speaker 7

Okay. That's really helpful. And then just my last question, rather broad question, but and I

Speaker 2

guess I'm thinking more about the side of the business,

Speaker 7

I mean, your competitive position is quite something, is very, very good. Are you seeing any changes in the competitive environment? I mean, the outlook is very strong. You're generating good results. The momentum is there.

Speaker 7

Is it attracting any moves on the competitive front that you're noting or worth calling out?

Speaker 2

No. Look, I don't see a difference. I would tell you that, certainly, before I concentrate on customers and meeting customers' demands That's what I'm focused on. That's what we're focused on. And you know, see our mantra is not to satisfy customers, it's to delight customers.

Speaker 2

What we do see is and you've seen it like airlines are much more amenable to outsourcing because we provide them the only real Global alternative, globally based alternative to be able to outsource the training and deliver training that is To the level that an airline would provide leveraging not only regulatory meeting regulatory requirements, The requirements of the airlines themselves are standard operating procedures as an example. I'll just point to the fact that 6 out of the Top 7 U. S. Airlines now are not training within our network. That's worse against 0 before the pandemic.

Speaker 2

You see this now Do a deal for training ASEAN, largest Greek there, training with Qantas. I mean, these are marquee airlines. So that's the dynamic that we see. So the competitive regard to me, I mean, look, I don't see any Difference in the competitive environment for the assembly.

Speaker 7

Okay, that's great. Thank you very much, Mark.

Operator

Our next question comes from Cameron Doerksen with National Bank Financial. Please proceed.

Speaker 8

Yes, thanks. Good afternoon. Just a question on Full Flight Simulator orders 22 in the quarter, obviously very strong. I just wonder if you can talk about the outlook for order activity there for the remainder of the year, because it does seem like you would be I know it's only 1 quarter, but very much on pace to

Speaker 2

It's been a long time since we haven't had a question on the number of full site similar deliveries like that. But look, I expect it to be elevated. Look, we've got 22 so far. What we're always focused, Cameron, is maintaining our share, our leading share. We're not going to take every order if it doesn't make sense.

Speaker 2

It has to be accretive to our expectations. But by and large, look, with the Commanding market share that we have, you will imagine that it's not a commodity game here. We basically compete on the fact that Again, our Sims are going to be out there for decades, and we're going to be supporting because that's what we do. So look, I would expect it to Yes. It may be elevated.

Speaker 2

As I said, we'll deliver probably over 50 full flight simulators for the year. I'm not going to get ahead of myself for the demand, but I can tell you that the demand is The demand out there in terms of what we see in the market is still pretty high.

Speaker 8

Okay. Great. That's good to hear. Second question on the future Air Crew training contract that you've been selected as preferred bidder for. Obviously, a huge contract over a long period of time.

Speaker 8

Assuming that that contract actually gets awarded in 2024, I just wonder if you can talk a bit about how that kind of scales up. I mean, is that something where you'd start to see Work flow in to CAE fairly quickly after contract award?

Speaker 2

Well, I think short answer is yes, okay. It is going to last for quite a long time. It's really and we're really talking about generational contract here. No exaggeration. I'm Pretty darn sure.

Speaker 2

I can tell you, I was in Moose Jaw just last Friday with our team. That's going to be a contract We're going to hire people that have spent their whole careers on this contract. No exaggeration. I'm very proud of that, the fact that we're creating such an opportunity. So look, I can't go and I think you would understand, I'm not going to go into specifics of contract because now we've got to move from being selective to negotiate terms and get the contract signed.

Speaker 2

So I can't go into detail. But look, this 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 there's a lot of work to be done to prepare New billings, new aircraft, a lot of new things, new simulators, but I won't get into absolute details right now.

Speaker 6

Okay,

Operator

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

Speaker 9

Great. Hey, good afternoon, guys. Mark, The pilot shortage issue in the industry has been long standing for the past few years now. And here we are, it seems like There's still tightness in the industry and this could get worse. So maybe a 3 part question and I apologize in advance.

Speaker 9

So first, how far along is the industry in addressing this? Are we in the 2nd inning, the 7th inning or are we spring training? 2nd, when you talk to airline customers about their needs, what's the level of urgency That they have and trying to attract new pilots to the industry versus where they should be if they want to address the problem. And the 3rd portion of this 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?

Speaker 2

Okay. A lot of questions here, but yes, look, For your question on the baseball analogy, I think we're still in the early innings with customer market. That's the way I would characterize it. There's 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.

Speaker 2

There is I could tell you there's lots of urgency amongst our customers out there, whether business aircraft, commercial airline customers for Sure. There's lots of urgency out there. And for us, airlines are doing a lot to Track and retain pilots. You see it everywhere. And for us, look, without putting a finer point on it, We just put out, as I was saying, our Aviation Professionals forecast at Paris Air Show, there's going to be a lot of Pilots, a lot of aircrews, a lot of maintenance technicians going to have to train over the next 10 years and that's our business.

Speaker 2

That's what we do and we're number 1 in the world at it. So I'm bullish almost any scenario.

Speaker 9

Great. And then in terms of the actions that they take, if they actually take those, I mean, what does that mean for CAE? Would you need to open up New aviation training facilities, like can you size the market and the opportunity if they actually take that action today?

Speaker 2

Well, we are doing it. I mean, you saw us we I think we launched 23 new simulators last year. I think we've either launched or opened ground on 8 new centers in The past few months. So we're moving and we'll continue to move in lockstep with demand. That's what we've always done and that's what we'll continue to do.

Speaker 2

But again, I'll emphasize that if we're going to deploy that capacity, we're going to do it with it's not a question of We're going to like build it and it will come. It will be we could see that demand for years to come and it will be and the contracts will be based on us being able to Support that capacity profitably, in line with the expectations that we have for those for the full segments.

Speaker 9

Great. Thank you, Mark.

Speaker 2

Thank you.

Operator

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

Speaker 3

Hi, good afternoon. This is Jordan on for Ron. I just had a question. So on the about $800,000,000 in unfunded backlog, could you guys give more color on when you expect that Fundings come through?

Speaker 2

Well, when we talk about unfunded backlog, really what you're talking about is I'm sure you know, but it's really if you win, let's say, you win a 7 year contract in United States, well, we'll only take the 1st year because that's the funded part of the U. S. Government. So, we fully expect the full contract to be realized. I don't think I've ever seen a contract, certainly the U.

Speaker 2

S. So, that definition has gone anywhere, but that way. So, I'll give you an example. We were selected on the FSTSS contract, that's a used contract where we'll be deploying new simulators for all the U. S.

Speaker 2

Army Training in Fort Rucker, we're now in Fort Novacell, which should be for us like U. S. Like $455,000,000 of contract and that will deploy over 12 years. So right now, we're not our order intake is not $455,000,000 very small actually, Very small part of that is in our order intake, but of course, it will be reflected in unfunded backlog.

Speaker 3

Got it. Thank you. And then just one quick follow-up too. On the $8,800,000,000 that you guys have out for bids and proposals, What do you guys see as your competitive advantage for those proposals to turn them into wins?

Speaker 2

Well, I think that's the first thing I would say is that we wouldn't bid them if we didn't think that we have a pretty good shot at winning them because If I take a defense proposals, they are very costly and timely to bid and they require a lot of Manpower expertise, so you want to make sure that your expertise, your resources are deployed On the ones that you think you can win. So look, I think that being so we expect to win them. We have pretty darn good shot. So for us beyond that, what are advantages? Well, scale for sure, the technology, the market leadership that we have And the fact that you look at CAE in the market, we're really the only pure play Platform independent, which is important because that makes us objective defense simulation training company.

Speaker 2

So that's very attractive in the market out there.

Speaker 3

Great. Thank you guys so much.

Speaker 2

Thank you.

Operator

Our next question comes from Michael Kippur with Desjardins Capital Markets. Please proceed.

Speaker 10

Thanks and good afternoon. Maybe on the Indigo order for 500 A320s, I know CAE currently has some exposure So the Indigo Cadet pilot program, maybe just when should we expect any civil top line or 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?

Speaker 2

Well, I think we're very well exposed to that because Indigo is we are partnered with Indigo and we have been partners beginning and launched the aircraft. So it's not only on Avonisho, but it's on all There are simulator based training centers that they do. So a very strong exposure to that. So we're very, very happy to See that. I mean, Indigo, look, they basically carry 50% of passengers over 50% of passengers in India and they fly to every airport In India, I know them well, great airline.

Speaker 2

And again, it's going to be very good for them. It's going to be very good for us.

Speaker 10

Thanks. That's great color. And maybe just on the India market in general, maybe some of the potential advantages that, that As over Asia, where in China, where you can actually provide both on premise training as well as the delivery of simulators?

Speaker 2

Well, we have a number of training centers in India right now, in Bangalore, in the 2 centers in Delhi. Right off the bat, we have Abidisho operations there as well. So we're well exposed on the ground in India right now.

Speaker 10

Perfect. That's great. And maybe just quickly a quick one on defense. Your margin came in slightly below sequentially at 3Q and 4Q of last year, is that mostly due to seasonality? Or was there any type of one time costs or other elements that impacted that?

Speaker 2

No, it's in line with our expectations. What we said, there's no it's certainly not a drop or anything. No, It's basically what I thought it would be as we basically talked about what the margin profile should be this year.

Speaker 1

All right. Thanks a lot. That helps. Thank you. Operator, I think that's all the time we have for financial analysts.

Operator

Thank you.

Speaker 1

Operator, are there no questions from the media?

Operator

There seems to be no questions at this time.

Speaker 1

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 the transcript will later be posted on CAE's website. Thank you. Au revoir.

Operator

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

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Earnings Conference Call
CAE Q1 2024
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