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Edited Transcript of CAE.TO earnings conference call or presentation 12-Feb-21 6:00pm GMT

·50 min read

Q3 2021 CAE Inc Earnings Call SAINT-LAURENT Feb 12, 2021 (Thomson StreetEvents) -- Edited Transcript of CAE Inc earnings conference call or presentation Friday, February 12, 2021 at 6:00:00pm GMT TEXT version of Transcript ================================================================================ Corporate Participants ================================================================================ * Andrew Arnovitz CAE Inc. - Senior Vice-President of Strategy & IR * Marc Parent CAE Inc. - President, CEO & Director * Sonya Branco CAE Inc. - Executive VP of Finance & CFO ================================================================================ Conference Call Participants ================================================================================ * Benoit Poirier Desjardins Securities Inc., Research Division - VP and Industrials, Transportation, Aerospace, Industrial Products & Special Situation Analyst * Cameron Doerksen National Bank Financial, Inc., Research Division - Analyst * Elizabeth Grenfell * Fadi Chamoun BMO Capital Markets Equity Research - MD & Analyst * Kevin Chiang CIBC Capital Markets, Research Division - Executive Director of Institutional Equity Research & Analyst * Konark Gupta Scotiabank Global Banking and Markets, Research Division - Analyst * Noah Poponak Goldman Sachs Group, Inc., Research Division - Equity Analyst ================================================================================ Presentation -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- Good day, ladies and gentlemen. Welcome to the CAE Third 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. You may now proceed, Mr. Arnovitz. -------------------------------------------------------------------------------- Andrew Arnovitz, CAE Inc. - Senior Vice-President of Strategy & IR [2] -------------------------------------------------------------------------------- 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 '21 and answers to questions, contain forward-looking statements. These forward-looking statements represent our expectations as of today, February 12, 2021, and accordingly, are subject to change. Such statements are based on assumptions that may not materialize and are subject to risks and uncertainties. Actual results may differ materially, and listeners are cautioned not to place undue reliance on these forward-looking statements. A description of the risks, factors and assumptions that may affect future results is contained in CAE's annual MD&A available on our corporate website and in our filings with the Canadian Securities Administrators on SEDAR and at the U.S. Securities and Exchange Commission on EDGAR. On the call with me this afternoon are Marc Parent, CAE's President and Chief Executive Officer; and Sonya Branco, our Chief Financial Officer. After remarks from Marc and Sonya, we'll take questions from financial analysts and institutional investors. And following the conclusion of that Q&A period, we'll open the call to questions from members of the media. Let me now turn the call over to Marc. -------------------------------------------------------------------------------- Marc Parent, CAE Inc. - President, CEO & Director [3] -------------------------------------------------------------------------------- Thank you, Andrew, and good afternoon to everyone joining us on the call. I'll first discuss some of the highlights of the quarter, and then Sonya will provide additional details about our financial performance. I'll come back at the end about our -- to talk about our outlook. We continue to manage well through a challenging period. CAE's stronger performance in the third quarter compared to the first half of the fiscal year reflects our ability to adapt quickly to a new normal and also the resiliency of our business, which is largely recurring. On a consolidated basis, earnings per share before specific items of $0.22 was nearly 70% higher than last quarter, and we had a near fivefold increase in free cash flow to $224 million, which is indicative of the cash-generative nature of our business. We also made important progress to significantly enhance CAE's position for future growth. During the quarter, we bolstered our financial resources with the issuance of $495 million of common equity, and we strengthened and expanded our market position with a succession of 3 acquisition announcements. In Civil, revenue increased by 13% compared with the second quarter, driven by 50% average training center utilization and the delivery of 10 full-flight simulators. We also continued to book new orders with Civil signing training solutions contracts valued at $329 million. These included 3 full-flight simulator sales and a 5-year exclusive business aviation training agreement with Bundeswehr of Germany for the global vision. We also signed an exclusive training agreement with MasAir, a new cargo airline in Mexico. And we signed a 5-year extension of our exclusive training agreement with Iberia to do all of their training. And finally, we signed another 5-year training agreement with TUI Airways, a British charter airline, and an exclusive 2-year pilot training agreement with LOT Polish Airlines on a broad range of aircraft platform. In Defence, revenue remained stable with last quarter, while the Defence segment operating margin was 7.5% as we continue to manage through COVID-related impacts and disruption on the timing of execution and deliveries. Near-term challenges aside, Defence booked orders for $261 million, including a contract with Lockheed Martin for a suite of C-130J training devices for the binational French and German C-130J training facility. We also signed with Lockheed for the supply of the CAE Magnetic Anomaly Detection-Extended Role system for the U.S. Navy MH-60R Seahawk helicopter. Also during the quarter, Defence was awarded a contract for the next increment of a multiyear contract with the United States Air Force to provide comprehensive C-130H aircrew training services as well as an order to continue providing the U.S. Navy with primary and advanced jet instructor support for the Chief of Naval Air Training at 5 Naval air stations. Finally, as a result of superior contract performance, Defence received a sole source extension award for T-44C aircrew training services through mid-2027. Defence also announced its involvement in a highly strategic contract to further develop and extend a single synthetic environment technology demonstrator for the United Kingdom's Strategic Command. The single synthetic environment, or SSE, aims to deliver a virtual world to be used for operational planning and decision support across all domains, cyber, space, maritime, land and air. This, together with the recent award to support U.S. Special Operations command last quarter, are indicative of the good progress that we've been making with our digitally immersive solutions. At the end of the quarter, Defence won the competitive recompete of the U.S. Air Force KC-135 training system contract, a program worth proximately USD 275 million over the next 8 years. This is a prime example of CAE's ability to renew and expand major long-term training systems contracts as the training partner of choice. And in Healthcare, we continue to deliver CAE Air1 ventilators and segment revenue more than tripled with margins reaching 10.7%. I'm extremely proud of what we've been able to accomplish, first, in rising to the challenge to develop the life-saving ventilators in a time of great humanitarian need and in our continued wartime efforts in the fight against COVID-19. We're continuing to provide new tools and training capabilities in support of our customers' training needs during this pandemic. These included solutions like CAE Vimedix 3.1, an ultrasound education platform with new remote learning and screen-sharing capabilities, curriculum development tools for distance learning and Microsoft HoloLens 2 mixed reality interface for remote education. We also expanded our adaptive clinical digital learning courses covering mechanical ventilation to include basic, advanced and COVID-19 patient management. With that, I'll now turn the call over to Sonya, who'll provide you additional details about our financial performance. So I'll return at the end of the call to comment on our outlook. Sonya? -------------------------------------------------------------------------------- Sonya Branco, CAE Inc. - Executive VP of Finance & CFO [4] -------------------------------------------------------------------------------- Thank you, Marc, and good afternoon, everyone. We continue to see good sequential performance improvements in the third quarter. Consolidated revenue of $832.4 million was up 18% compared to the second quarter and is 10% lower compared to the third quarter last year. Segment operating income before specific items was $97.2 million compared to $79.3 million in Q2 and $157.2 million last year. Quarterly net income before specific items was $60 million or $0.22 per share, which on the same basis compares to $0.13 in Q2 and $0.37 in the third quarter last year. We had strong free cash flow in the quarter of $224 million, which is a solid improvement over the $44.9 million we generated in the second quarter and is a result of continued good cash flow from operations and reversals in noncash working capital accounts. I'm especially pleased to see that even with the negative free cash flow performance we had in the first quarter when the brunt of the pandemic hit us, we're now at positive $176.2 million of free cash flow for the 9 months year-to-date. We still face challenging conditions, but we're confident about our outlook to be free cash flow positive for the year. Growth and maintenance capital expenditures totaled $23.9 million this quarter, and for the first 9 months of the fiscal year totaled $57.1 million. We had indicated in our outlook that we expected total CapEx to be approximately $100 million for the year, and this continues to be our goal. Our growth CapEx is directly linked to our opportunities to invest incremental capital with attractive returns and free cash flows. Income tax recovery this quarter was $0.1 million, representing an effective tax rate of nil, which compares to 16% for the third quarter last year. The tax rate was low for 2 reasons: first, the positive impact of some tax audits; and second because of the restructuring costs we incurred this quarter. Excluding the effect of these elements, the income tax rate would have been 16% this quarter, the same as Q3 of last year. Our net debt position at the end of the quarter was $1.8 billion or a net debt to total capital ratio of 38.9%, which is back within our target range of 35% to 45%. And net debt-to-EBITDA before specific items was 2.65x at the end of the quarter. All told between cash and available credit, we have approximately $2.4 billion of available liquidity. CAE's liquidity was further enhanced with the completion in November of a public offering in a concurrent private placement of common shares for aggregate gross proceeds of $495.3 million. The net proceeds are intended to fund growth investments, including the 3 acquisitions we recently completed and other future potential acquisitions and growth opportunities. Pending such uses, we've been using the proceeds to repay indebtedness on our credit facilities and to hold them as cash and cash equivalents. On the restructuring front, we're continuing to make good progress. The program is enabling CAE to best serve the market by optimizing our global asset base and footprint, adapting our global workforce and adjusting our business to correspond with the expected level of demand and enduring structural efficiencies. We began executing our restructuring program last quarter, and as of the end of last December, we had incurred a total of $65.4 million of restructuring expenses. We expect to record a total of approximately $140 million of restructuring expense this fiscal year, which is higher than our previous estimate because we've identified additional measures to optimize our global asset base and footprint. Plus we now have some additional restructuring related to optimization and integration of our recent acquisitions. In connection with these efforts, we expect additional restructuring expenses of about $30 million in fiscal 2022. Taken together, we expect our restructuring program to translate into significant annual recurring cost savings commencing in fiscal 2022 and ramping up to a run rate of approximately $65 million to $70 million. With that, I will ask Marc to discuss the way forward. -------------------------------------------------------------------------------- Marc Parent, CAE Inc. - President, CEO & Director [5] -------------------------------------------------------------------------------- Thanks, Sonya. Clearly, CAE is clearly in a much stronger position than it was back when the pandemic hit, and we're bullish about CAE's long-term prospects to emerge from this period in a position of even greater strength. We are successfully implementing measures to fortify the company internally and finding additional opportunities for greater efficiencies. We've also made excellent strides to capitalize on external opportunities to enhance our market position and deploy growth capital. We're leaning in and focusing on the long term, bolstering our standing as the global market leader in our field through the application of advanced technologies and by expanding the aperture of our market reach. And we're continuing to invest and seize capabilities to revolutionize our customers' training and critical operations and increase market share with digitally immersive solutions. And while COVID-19 remains a persistent global reality, we're encouraged by the light at the end of the tunnel, and we recognize that market recovery is really a question of when and not if. Fundamentally, the secular growth drivers for our business are unchanged. The resumption of CAE's recovery remains highly dependent on the timing and rate at which travel restrictions and quarantines can eventually be safely lifted and normal activities resume in our end markets. Now looking at each of our other business segments. In Civil, we expect to see a relatively stable performance in the fourth quarter compared to our current third quarter results. The global rollout of vaccines to combat COVID-19 is indeed encouraging. However, the renewed quarantine measures and border restrictions to contain the spread of the virus have contributed to expectations for potentially more protracted recovery period for commercial air travel, particularly for cross border and transcontinental operations. At the same time, we expect to continue expanding our market share and securing new customer partnerships with our innovative training and operational solutions. We're in advanced discussions with airlines about potential outsourcings and partnerships. And while we don't control the timeline of these agreements, we expect some of our pipeline to come to fruition in the period ahead. Business aviation training has been recovering faster than commercial, and we continue to see this trend moving forward. Demand for civil full-flight simulators is driven by new aircraft deliveries. And while the total market is currently much smaller, we expect to maintain our leading share of available full-flight simulator sales. We benefit from a large backlog of customer-funded full-flight simulator orders, and we expect to substantially deliver this backlog over the next couple of years, including approximately 35 this fiscal year. In Defence, we're managing through a transition year. And as we work our way through the short-term challenges brought by the pandemic and ramp up a reinvigorated growth strategy under our highly talented new leadership, the long-term outlook for Defence continues to be for growth, supported by a large addressable market for our innovative solutions and the realization of the benefits our bolstered team will bring to bear. I'm encouraged by our new competitive wins, large pipeline and our recent success in the security sector with a contract award to provide the United States Customs and Border Protection with aircraft pilot training services. This win leverages the CAE Dothan Training Centre and CAE's commercial and business aviation training centers to deliver simulator and lifelike training services on a range of fixed-wing and rotary-wing platforms. We were also selected after a highly competitive process to demonstrate our capabilities to the U.S. Army Futures Command as part of a synthetic training environment program, which is designed to provide a collective, multi-echelon training and mission rehearsal capability across the Army. And the takeaway here is that while managing through our current period, we're also focused on the long term, and we're investing in our leading position as a training and mission support partner with leading-edge capabilities and translating the physical world into the synthetic world. We're implementing a strategy to expand beyond training to become a leader in digital immersion and the application of a synthetic environment to support analysis, planning and operational decision-making. With our expertise in the integration of live, virtual and constructive training, along with capabilities to address mission and operation support, we believe will make significant inroads into the broader defense market in the period ahead. And in Healthcare, we're capitalizing on the greater market appreciation of the benefits of health care simulation and training to improve safety and to help save lives. In addition to our core Healthcare business activity, we're continuing to work towards the delivery of our ventilator contract with the Government of Canada, and we're also continuing to find innovative ways to provide even more solutions to make the world a safer place. The contract we announced last week with Pure to build and help develop high-tech air sanitizers allows us the great benefit of maintaining manufacturing jobs in Montreal, while continuing to play a lead role in a fight against the pandemic. And it's another great example of CAE's agility in leveraging our strength in new ways. In fact, we obtained this particular contract by leveraging the expertise we gained developing ventilators as well as the ISO certification for medical device design, manufacturing and distribution that we obtained just last month. CAE has been an innovation powerhouse for more than 70 years with world class engineering, intellectual property, supply chain and manufacturing capabilities, and I look forward to more great things to come. With that, I thank you for your attention, and we're now ready to answer your questions. -------------------------------------------------------------------------------- Andrew Arnovitz, CAE Inc. - Senior Vice-President of Strategy & IR [6] -------------------------------------------------------------------------------- Thank you, Marc. ================================================================================ Questions and Answers -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- (Operator Instructions) Our first question comes from the line of Kevin Chiang from CIBC. -------------------------------------------------------------------------------- Kevin Chiang, CIBC Capital Markets, Research Division - Executive Director of Institutional Equity Research & Analyst [2] -------------------------------------------------------------------------------- Maybe if I can ask about what you're seeing from your customers as they prepare -- as the airlines prepare for an eventual recovery in air traffic. Are you having accelerated discussions about getting their workforce ready for that eventual recovery? And I know, I guess, early in the pandemic, there was this thesis out there of a pilot training bubble that could potentially emerge as airlines rush to retrain their pilots here that have been furloughed. Just wondering how -- what you're seeing sitting in your position today. -------------------------------------------------------------------------------- Marc Parent, CAE Inc. - President, CEO & Director [3] -------------------------------------------------------------------------------- Well, I can tell you, Kevin, that we're having a lot of discussions with airlines as they prepare themselves to -- for the recovery that will surely come as people get more and more vaccinated. Forward bookings -- what we're hearing, forward bookings at the airlines are very high, especially on leisure travel. And so -- and we're working with them basically hand-to-hand so that they have the proper training -- their pilot crews trained to be able to handle that upswing. Now of course, there's a hypothesis of when everybody will be trained. So they are keeping their powder dry from that point of view. From our standpoint, look, we're -- it's reflecting in the utilization that we have now. We're seeing -- we're ramping up, for example, 737 MAX training. We deployed more assets in support of that airplane coming back online. Look, the pilot training bubble, I think, not in material numbers, I would say right now, it's really going -- that really is going to depend at the rate at which the recovery happens. And the rate at which, for example, wide-body aircraft have to put back online relative to the assumptions that are out there today, which is one, I think, basically, we're continuing to follow, which is the IATA's predictions as to when air traffic recovers, and so to 2019 levels, so late '23, '24. I think that's the way I would characterize it. -------------------------------------------------------------------------------- Kevin Chiang, CIBC Capital Markets, Research Division - Executive Director of Institutional Equity Research & Analyst [4] -------------------------------------------------------------------------------- That's helpful. And maybe just my second question here. You made a couple of acquisitions or 3 acquisitions, as you noted. Maybe the one that I thought was the most interested was the acquisition of Merlot, which expanded your capabilities into crew management and some of optimization software. As you kind of come through the pandemic, can you speak to what you see in terms of maybe other ancillary services you think you can bolt-on to your core business, and other digital solutions you think you can add to kind of grow your overall maybe total market size relative to maybe the way you saw the market pre-pandemic? -------------------------------------------------------------------------------- Marc Parent, CAE Inc. - President, CEO & Director [5] -------------------------------------------------------------------------------- Well, no, absolutely. We had identified this market before that. In fact, we were already serving it, perhaps not in an overly material way, but an example I would point to is, for example, SAS, I've talked to that before, where we basically -- in the case of that particular airline see personnel, not -- we don't only train the pilots, they -- employees with the pilots. They were with the cabin crew and basically became airline of -- employees when they basically operate the aircraft itself. So it's kind of a complete crew resource offering. That was just one example of what we'll do. Of course, we do a lot of that through our CAE Park. But -- so what we're seeing is now -- do is move even more aggressively into what I consider as a very large and aggressive -- sorry, and sizable market there that's attractive because it appeals to everything we know into -- about the whole pilot ecosystem. Remember, we're in every part of the pilot ecosystem from training people to become airline pilots, training them initially on the type of aircraft, doing their recurrent trainings throughout their career, and finally providing, as I mentioned, through Park and opportunities like CAE Airline, a complete solution. So that gives us unique skills and insights to offer a much broader set of services than purely providing training. That's what you see us doing here. And it's a natural. It's the same customers. And they have -- there is very real pain points in their operations that they will, in many, many cases, be very, very happy to look to someone like ourselves who can basically take that over for them and provide them synergies. And actually, through our digital offerings, to be able to give them insights into their operation because of just the sheer scale that we can provide that they can't do by themselves. That's a thesis we're going into it. Very happy about the acquisition of Merlot. Great team that we have. Their headquarter's in New Zealand, great set of customers, and I feel very good about that. More to be said, but I think it's going to be, to me, a very attractive market. For me, what it does in terms of dollars and cents, it increases our addressable market in Civil from notionally about $4.6 billion to about $6.1 billion. And I'm talking pre-COVID, kind of normalized figures here, but that's what I would tell you. -------------------------------------------------------------------------------- Operator [6] -------------------------------------------------------------------------------- Our next question comes from the line of Elizabeth Grenfell with Bank of America. -------------------------------------------------------------------------------- Elizabeth Grenfell, [7] -------------------------------------------------------------------------------- I'm calling on Ron's behalf. If we see air travel back to 2019 levels in 2023, how do you expect that recovery to play out for you? -------------------------------------------------------------------------------- Marc Parent, CAE Inc. - President, CEO & Director [8] -------------------------------------------------------------------------------- Well, I think we're pretty -- what you're going to look for us -- 2 things. First of all, I mean when I'm talking about that, I'm talking about commercial aviation travel, not business aviation. Business aviation has already recovered quite nicely, and we continue to be -- it's already about -- right now, as we sit, about 15% of pre-pandemic levels in the -- based on business jet cycles in United States and in Europe. In terms of commercial aviation, the way it pans out for us is to just watch the airplanes that are flying because our business is regulated. So as long as there is 2 pilots flying those airplanes at the front, they have to go back to training literally on an average basis throughout the world every 6 months. So for us, it's look at the utilization of the aircraft themselves. So at the moment, utilization of the airplane fell about 50% from -- based on maybe 80% before pandemic. So for us, as airlines add more flights and more utilization, our business in terms of utilization in our training center is very, very highly correlated to that. So the utilization of the active fleet of aircraft and how they're being used in the fleet. So expect it to follow that trend. And the additional color I would give you is that we expect of that recovery to -- the narrow-body sector to recover faster. That's, I think, pretty much a consensus, and that's the consensus that we get based on talking to our customers, which, of course, because of our market position, represents the majority of the world airlines. So the fact that the narrow-body recovers faster is a good thing for us because 75% of our network of full-flight simulators in our training centers are narrow-body aircraft. And when I come back to just additional color on business aircraft, about 1/3 of our revenue in Civil also comes from business aircraft, which -- that's important because it's also a more profitable segment. So that factors into it itself. -------------------------------------------------------------------------------- Operator [9] -------------------------------------------------------------------------------- And our next question comes from the line of Fadi Chamoun with BMO Capital Markets. -------------------------------------------------------------------------------- Fadi Chamoun, BMO Capital Markets Equity Research - MD & Analyst [10] -------------------------------------------------------------------------------- A couple of questions. First, on the acquisitions. I guess you addressed some of the strategic kind of positives with Merlot. But the other 2 acquisition, now that you've kind of had a chance to take a look under the hood, can you kind of share with us a little bit about the opportunities you see there, the integration process? How do you feel about these 2 acquisitions now that you've had a chance to kind of take a look at them a little bit more closely? The other quick question is to Sonya. Maybe if you can help us frame the restructuring benefit that you expect in 2022. I think you mentioned up to a run rate of $65 million to $70 million, ramping up, but is that kind of by end of 2022? Like how much of that restructuring benefits should we expect to be realized next year? -------------------------------------------------------------------------------- Marc Parent, CAE Inc. - President, CEO & Director [11] -------------------------------------------------------------------------------- Okay. Maybe I'll just kick it off, Fadi. Look, I would tell, with the acquisition -- the other 2 acquisitions, which is the FSC and TRU. Look, no surprises, except made to say, look, we're very happy with what we see. It's always great that obviously, we know our business. I think we knew them well in terms of -- if you think about FSC, they bought essentially all of their new simulators from us over the years. I sold them back in 2006, I believe it was. But -- so we know them well and very, very happy with the team coming on board. No surprises on the integration. And so it's -- I would say, it's exactly on track, if not ahead of where we expect it to be. In terms of TRU, very similar, very similar. Of course, as you know, they're very down the street from us here in Montreal. Great facilities and a great bunch of people. I think that good book of business, which we knew, I like what I see. I think that it reinforces our relationship as well with Boeing. I think that's an important one because Boeing was their supplier for the 777X and the 737 MAX from original equipment simulators. So that's very attractive for us. We knew about that, but again, very happy about what we see. In both cases, the integration, I would say, is right on track, if not ahead. Sonya? -------------------------------------------------------------------------------- Sonya Branco, CAE Inc. - Executive VP of Finance & CFO [12] -------------------------------------------------------------------------------- And I'll jump in for -- on your question for restructuring. So we started the program in Q2, and it's progressing well. Now a good part of the program is about asset and footprint optimization. So these are long lead items like relocating simulators, et cetera, moving people and closing down leased facilities. So -- and that's underway. We've got a good amount under our belt, but it will continue on over the next couple of quarters as well as kind of a lot of the process -- digitally driven process improvements underway. So we're going to see those savings basically come through next year in FY '22. At least $50 million of recurring savings for the full year of FY '22, as we had talked to. And now with the additional measures that we've identified, as we continue on this quest for optimization and streamlining, we've identified additional measures. So different types of locations and opportunities that will be starting this quarter and through the new year, the new fiscal year. So those will take a little longer to ramp up. And so probably that incremental savings will come through throughout towards the latter end of the year and ramp up to a run rate of $65 million to $70 million recurring annual savings. -------------------------------------------------------------------------------- Operator [13] -------------------------------------------------------------------------------- And our next question comes from the line of Nia Poponak with Goldman Sachs. -------------------------------------------------------------------------------- Noah Poponak, Goldman Sachs Group, Inc., Research Division - Equity Analyst [14] -------------------------------------------------------------------------------- Marc, just staying on the topic of the recovery in Civil training, and sort of, I guess, the lead lag for you and how you're tethered to that. On the one hand, it is clearly not visible exactly when the recovery starts and the pace of recovery, but on the other hand, I've been pretty surprised at just how many airlines are out there talking about -- especially domestic-oriented airlines talking about flying this summer, 80%, 90% of their 2019 capacity. And you just mentioned being more tethered to narrow-body than wide-body. So I guess I'm a little surprised you're not seeing that already. Maybe you could just speak to that? And I guess, specifically, what is the lead time for training pilots tethered to specific capacity that is coming back? Can it be done in pretty short order? Is that why you're not seeing it yet? -------------------------------------------------------------------------------- Marc Parent, CAE Inc. - President, CEO & Director [15] -------------------------------------------------------------------------------- Well, I think that the level of activity that we're seeing is certainly not representing 90% flying rate now. But I think, hopefully, we will see that this summer, and I fully expect that. There is a lot of pent-up demand. All of us want to get back on airlines. All of us want go -- they say sitting in Montreal with minus 18, I want to go South. So I think, look, for us, it's going to be -- when are borders going to open, when are these quarantine rules going to be lifted. And again, in Montreal, we have 8 o' clock curfew. So that basically, it's -- for us, it's just -- as I mentioned before, we're highly correlated to the level of airplanes fly, the level of flying activity. So yes, a lot of airplanes flying. You've got to question, how many flights per day, right? When that frequency starts increasing because there's more volume, you're going to see obviously more pilots going to be needed, so you're going to see more training activity, more utilization in our training centers. So if you look about 50% utilization of aircraft right now, you see about 50% average utilization in our commercial aviation training activity. So I think that's what we're going to see. Watch that metric. We're highly correlated to it. -------------------------------------------------------------------------------- Noah Poponak, Goldman Sachs Group, Inc., Research Division - Equity Analyst [16] -------------------------------------------------------------------------------- That makes a ton of sense. And again, I recognize that we're nowhere near 90% of 2019 on much of anything right now. But again, if there are a bunch of U.S. domestic airlines or there is just a decent amount of airlines talking about flying. A surprising -- a capacity level surprisingly close to 2019 this summer, wouldn't -- how far in advance of doing that do they have to do the training? Are they able to do the training pretty close to doing that? I would have thought it would have been a few months in advance. -------------------------------------------------------------------------------- Marc Parent, CAE Inc. - President, CEO & Director [17] -------------------------------------------------------------------------------- Like, it depends if you're talking about pilots that are on staff that are maintaining their certifications, then as long as they keep doing their -- every 6 months, going back into a simulator, maintaining stuff, like they have to do a certain number of landings every 90 days, those kind of things, then they're easy to bring back online. Where you really have the issue, where it takes months, is if a pilot falls out of certification, that will typically fall if you really haven't -- you've gone back to training after a year, then you're out. Then you have to go back, essentially, to square one. That could take months because what you have -- any individual pilot, let's say, flying a narrow-body, 737 or A320, they'll have to go back to school, go back to a type rating course, you maybe a month out. But of course, that's one month for one pilot, but then you have to have the available infrastructure in training number of simulators, number of training slots to be able to train any volume of sell back online. I think maybe the other thing that -- if you're talking about U.S., say, for example, what we call the main carriers, they have their own simulators. So that may be where you don't see it translating in our training activity, but we see that in other ways in terms of the update activity that happens. And for us, talking to them and actually doing stuff about supporting them with regards to overflow training when they will need that delta training. That -- those are the kind of discussions that we have... -------------------------------------------------------------------------------- Noah Poponak, Goldman Sachs Group, Inc., Research Division - Equity Analyst [18] -------------------------------------------------------------------------------- I guess, when I roll it all up, given what you saw in the quarter and then you're discussing next quarter being pretty stable. It doesn't sound like I should be counting on much of a jump in your revenue that leads the global system-wide capacity, and instead, I should really just tether you to that. Is that the conclusion? -------------------------------------------------------------------------------- Marc Parent, CAE Inc. - President, CEO & Director [19] -------------------------------------------------------------------------------- Well, what I said, I think, is when I look at the utilization in our training centers, I expect a very similar level in the quarter that we're in based on what I've seen in the third quarter. So that's what we're seeing. And we have pretty good visibility on it because, obviously, where we sit in terms of date, we've got a month and some behind us -- 1.5 months behind us, and we have a pretty good view of bookings in our network of training centers. So that's where I'm coming from. -------------------------------------------------------------------------------- Noah Poponak, Goldman Sachs Group, Inc., Research Division - Equity Analyst [20] -------------------------------------------------------------------------------- I see. That's helpful. -------------------------------------------------------------------------------- Marc Parent, CAE Inc. - President, CEO & Director [21] -------------------------------------------------------------------------------- Again, to me, it's like we're talking about weeks now. We're talking about -- it doesn't change at all the fundamental thesis of the CAE even going into the end of the year. -------------------------------------------------------------------------------- Noah Poponak, Goldman Sachs Group, Inc., Research Division - Equity Analyst [22] -------------------------------------------------------------------------------- Yes. No, I don't think it -- I hear you there. I probably just had the lead time confused. But that's all helpful. In the Healthcare business, it's a very significant at least percentage change in the quarterly revenue, and we've seen the new product announcements. Can you help us out with what from this increase is long-term sustainable versus only short term related to COVID versus was literally just this quarter? -------------------------------------------------------------------------------- Marc Parent, CAE Inc. - President, CEO & Director [23] -------------------------------------------------------------------------------- Well, the big -- I mean, I would tell you, it's not just this quarter, but it is related to the Canadian ventilator contract, which we said from the outset, this is us stepping up as part of the war time effort to help our fellow citizens with being -- developing from scratch a ventilator of which we got the contract with the Canadian government. So what you're seeing there is the contribution in earnest of the ventilators, and that's about -- I would tell you about half of the order, we -- the good news is that the fact is that the pandemic where it's at and with less severity overall in terms of the use of ventilators, it's not going to be as many needed. And so I think we had a contract for about -- well, not for about, 10,000, we'll deliver about 8,200. So about a little over double -- well, we delivered, in fact, 4,257 this past quarter. We'll deliver a total of 8,200. So it's just a little bit more -- less than 4,000. So the contribution over the next quarter, couple of quarters will probably be similar to -- in terms of -- from that contract to what you've seen. And you're talking about teens kind of margins on that contribution. Beyond that -- so I think going back to your question. So the big increase is due to that one contract, and that contract is coming to an end. Now having said that, what I would tell you is that, that just demonstrates the capability that we have at CAE when you think about that we're able to literally from scratch design an engineer and deliver a highly technical device like a ventilator tells you what we're able to do. We transitioned -- we announced last week, we transitioned our workforce here in Montréal to [fabrication] 50,000 air purifier units that are revolutionary in what they do. So that will help us not only to -- basically, if you like, maintain 100 jobs in the production line, which is good because it absorbs overhead. And it has, I wouldn't say a material contribution to earnings, but certainly not dilutive by any measure. And more importantly, yes, I think there is more legs potentially to that. Early days, but -- and from a larger standpoint, I am very bullish on the future growth in Healthcare, very bullish. If there is anything that this pandemic has demonstrated is not only what we can do in Healthcare, but the receptivity of customers to the kind of products and services in Healthcare that CAE's brand can bring to bear. And early days and under the leadership of Heidi Wood leveraging that division in earnest and adding our digital capabilities, I've never been more bullish that Healthcare will become a meaningful part of CAE in -- not in 10 years. -------------------------------------------------------------------------------- Operator [24] -------------------------------------------------------------------------------- Our next question comes from the line of Konark Gupta with Scotiabank. -------------------------------------------------------------------------------- Konark Gupta, Scotiabank Global Banking and Markets, Research Division - Analyst [25] -------------------------------------------------------------------------------- So perhaps, the first one on Defence. The order activity seems to be good, like it's kind of holding up despite, obviously, all the pandemic-related issues you spoke about. But what's -- wondering what's kind of putting pressure on revenue and margin compared to where this thing is in your backlog? And like it's a 10% to 12% kind of margin backlog, but we are not seeing those margins yet. And revenue is kind of maybe capped because of those pandemic issues. But any additional color you can provide on what's causing Defence program execution here. -------------------------------------------------------------------------------- Marc Parent, CAE Inc. - President, CEO & Director [26] -------------------------------------------------------------------------------- Well, look, I think -- first of all, maybe say that my thesis hasn't changed at all that Defence is a growing business. I mean we're in a transition year and now for a number of reasons. Although we have had some good order activity, the fact is that -- and I'm very happy, but as I mentioned on the call -- during my conference call remarks here, the kind of awards that we're winning, to me, are marquee contract that really demonstrate CAE's credentials in training across the world. You just think about the KC-135 contract, very major contracts for the U.S. Air Force and contracts that we have with Special Forces on synthetic environment contracts that demonstrate the expertise and the technology that we can bring to bear that is really going to be critical going forward. So I think short term, what we're seeing here is, there is some of it, and I think that's going to persist for a little while is the dearth of order activity. Because like it or not, the military support areas like procurement, engineering, are just like everything else, hit by COVID-related absenteeism and disruption. So that is affecting near-term order activity. Not that orders go away, but in fact, that they get protracted in terms of when they were actually going to be awarded because of the work required to be able to do that. Nearer term, right now, we are being affected by COVID. I can give you specific examples. We have -- for example, in our Tampa training facility, we have a major training facility where we do C-130H training, and the largest part of training we do that for foreign militaries and that tends to be good business. Unfortunately, because of border restrictions and travel restrictions, the customers can't get to the training center. That's just one example. Again, near-term issues, but -- so those -- that's -- the major color I would give you that's affecting our results in Defence at the moment. Is that -- that's what -- that's where I'll end it right now maybe, unless you want to expand the question. -------------------------------------------------------------------------------- Konark Gupta, Scotiabank Global Banking and Markets, Research Division - Analyst [27] -------------------------------------------------------------------------------- No. Absolutely, that makes sense, clearly. I think that's what I thought, the travel restriction, but I was just curious as to if there is anything overly materially incremental, but that kind of makes sense. That's good. On the full-flight simulators on the Civil side, so you talked about in the MD&A and disclosures that the backlog is pretty strong and should support production for the next couple of years, at least. Just curious as to the 35 deliveries you are planning for this fiscal year, is that sustainable with the current backlog for the next 2 years? Or do you need to win more orders on the FFS side to produce 35 each year? -------------------------------------------------------------------------------- Marc Parent, CAE Inc. - President, CEO & Director [28] -------------------------------------------------------------------------------- Well, I don't think we've given a lot of guidance to that. You're going beyond level of guidance right now. But I would say, look, it doesn't -- I'll remain to what I said is that we'll deliver that backlog over the next couple of years. Look, if we were to -- let's say, we're going to get no orders, well, which is not going to happen. We're already getting orders, and we still -- and we have a lot of interest in our -- with customers as they ramp up taking on airplanes because deliveries are being restarted. I think we will get orders. So the situation that you talked about really doesn't occur. But I really -- those contracts that we have, the backlog that we have, the real driving factor here is the date that we've committed to the airlines, and those are firm. And pretty much -- well, not pretty much, but every one of those contracts has been looked at in terms of -- in some cases, the customers wanted to basically defer the delivery because of the situation, deferment of the aircraft. And everyone now has a new date, which is firm, and that's what we're executing to. And that -- and so a long answer short -- a long answer, but the delivery of that backlog is preferred over the next couple of years. -------------------------------------------------------------------------------- Konark Gupta, Scotiabank Global Banking and Markets, Research Division - Analyst [29] -------------------------------------------------------------------------------- Okay. That's good. And just kind of expanding on that a little bit because you talked about the MAX earlier on the call. The TRU acquisition, and clearly, they were kind of aligned with Boeing on that MAX sim orders. Wondering if your backlog for MAX sims here, where is that right now? And what are your plans for production on the MAX side, please? -------------------------------------------------------------------------------- Marc Parent, CAE Inc. - President, CEO & Director [30] -------------------------------------------------------------------------------- Well, I can tell you, and yes, TRU fits in very, very well with that. At CAE -- if I look at the situation on MAX today, at CAE, we've delivered 41 MAX simulators to date, and that includes 5 in our network. We have sold 53. Now I would say, we have sold 57 total, but we had -- we deferred 2 in our network, and we had 2 deferrals from another airline. So I would say, net 53 sold today. TRU have 11 simulators delivered to date, and they have 14 sold. And that's the entirety of all the 737 MAX simulators. And we're continuing to support Boeing through a MAX overflow training agreement. And that's exciting because it's our first training cooperation with Boeing. I'm quite excited about that, and that's specifically on the MAX. -------------------------------------------------------------------------------- Konark Gupta, Scotiabank Global Banking and Markets, Research Division - Analyst [31] -------------------------------------------------------------------------------- That's great. That's really good color, Marc, there. And last one for me, I was wondering... -------------------------------------------------------------------------------- Marc Parent, CAE Inc. - President, CEO & Director [32] -------------------------------------------------------------------------------- Last thing I would tell you is, maybe just a little bit more color. Based on the number of aircraft that are out there, I certainly expect northward of 50 to 60 737 MAX simulators over the next 5 years minimum. -------------------------------------------------------------------------------- Konark Gupta, Scotiabank Global Banking and Markets, Research Division - Analyst [33] -------------------------------------------------------------------------------- Okay. That's great. And last one for Sonya. Free cash flow-wise. Obviously, Q3 was so good in terms of cash flow and working capital generally tends to contribute a lot in the third quarter. But just wondering, Sonya, if -- looking at the historical numbers, usually, working capital, seasonality-wise comes off in Q4. Anything this time you think is different the last few years in terms of seasonality? And then obviously, CapEx kind of picks up as well, right, in Q4 this year. So any color on the free cash flow heading into Q4. -------------------------------------------------------------------------------- Sonya Branco, CAE Inc. - Executive VP of Finance & CFO [34] -------------------------------------------------------------------------------- Yes, absolutely. So I agree with you, a solid Q3 performance with $224 million. And really, that's a reflection of improving operating performance flowing through in the cash from ops. So you see quarter-over-quarter continued improvement there. And obviously, it's the operating performance and continued cost and cash preservation measures and so on that we've put into place. And just absolutely continued focus on each of these, and it really kind of demonstrates the cash-generative nature of the business. So we add to that, the noncash working capital performance. And to your question on seasonality, we are seeing a similar pattern investment in the first half and a reversal in -- a partial reversal in the second half. We do expect that to stay in an investment position for the year. So it should follow in the trend. So Q3 being one of the strongest performers in a noncash working cap. And where we saw that was really a nice step up on elections in our DSO, and as you can imagine, with the pandemic and all that was going on, there was, I guess, an increase in the day sales outstanding. And with all of the focus, that's starting to come back down and also a really good view and visibility and management on inventory and supply chain. So we continue to focus on generating cash and minimizing the working capital. So -- and it will follow pretty much the seasonality that you've seen in the past. In terms of CapEx, we've spent almost -- about a little less than $60 million to date. And we do expect a ramp-up in the fourth quarter in pace with the plans that we have, some of the spend that we'll do to support the restructuring program as we move some of the locations, but also investing in the opportunities that we have. We still continue to see good opportunities to deploy accretive CapEx. And frankly, especially in the business aviation field where those organic investments really kind of deliver significant incremental returns that you've seen inside the organic deployments we've done, it drives 20% to 30% incremental return on capital within 2 to 3 years. So as we see those opportunities and lockstep with the demand -- secure demand from the customers, then we're deploying the capital accordingly. -------------------------------------------------------------------------------- Andrew Arnovitz, CAE Inc. - Senior Vice-President of Strategy & IR [35] -------------------------------------------------------------------------------- Operator, we're running a little thin on time here. I think we'll take 2 more last questions before we open up to members of the media. -------------------------------------------------------------------------------- Operator [36] -------------------------------------------------------------------------------- Our next question comes from the line of Cameron Doerksen with National Bank Financial. -------------------------------------------------------------------------------- Cameron Doerksen, National Bank Financial, Inc., Research Division - Analyst [37] -------------------------------------------------------------------------------- Just really kind of wanted to follow-up on an earlier question, just with regards to the Healthcare segment. I mean, obviously, CAE is known as a training and simulation company. And I get that you've won this ventilator contract and then that you've stepped up there, and it's obviously a pretty nice win there. But I was just sort of wondering about this air purifier contract, and that sounds more like a contract to manufacturing type of deal. I'm just wondering if there is like a shift in strategy here in Healthcare where it's kind of no longer solely focused on training and simulation, and now you're just kind of looking for other opportunities. So maybe if you can just describe what sort of the go-forward strategy is in the Healthcare segment? -------------------------------------------------------------------------------- Marc Parent, CAE Inc. - President, CEO & Director [38] -------------------------------------------------------------------------------- No, you're correct, Cameron. The strategy hasn't changed. We're saying, we're very much focused on the opportunities that we have, and there is quite a market there. And it's a growing market with regards to what we can do in simulation and training. So if there is a change in strategy, but there is none now. We have been, as I said, this -- both contracts are part of the humanitarian effort that we've done to support, again, our fellow global citizens in the fight against COVID-19. But it just demonstrates what we're able to do at CAE, and I think that speaks for itself, but that speaks for itself in all of our business. The systems engineering expertise, the manufacturing expertise that we have, the global sourcing opportunity, software and the integration of it all with the subject matter expertise that we have in areas such as Healthcare. That's where it all comes together, and I think that's applicable. But again, no change in strategy in terms of Healthcare. -------------------------------------------------------------------------------- Operator [39] -------------------------------------------------------------------------------- And our next question comes from the line of Benoit Poirier with Desjardins Capital Markets. -------------------------------------------------------------------------------- Benoit Poirier, Desjardins Securities Inc., Research Division - VP and Industrials, Transportation, Aerospace, Industrial Products & Special Situation Analyst [40] -------------------------------------------------------------------------------- Just to come back on Defence. Obviously, you talk about the pandemic that contributed to delays in the execution. But as we go beyond this pandemic and this transition year, especially with the new President in the U.S., how should we be thinking about CAE's ability to rebound in terms of revenue growth and margin in fiscal '22 and beyond? -------------------------------------------------------------------------------- Marc Parent, CAE Inc. - President, CEO & Director [41] -------------------------------------------------------------------------------- Yes. Well, look, I think you should feel good about it. As I said, I certainly do. I am -- as I mentioned, I repeat, as you said, we're managing through a transition year. And we're working through challenges, which are short term, and they're real. They're brought about by the pandemic, and -- but we have a growth strategy that's been reinvigorated through the input that we have, not only from Heidi Wood, who ran it in the interim that we're in the beginning for about 6 months and Dan Gelson, who runs the business now with a wealth of experience in the defense sector and the security sectors. I'm very bullish on what we can do here. And what we're focusing more is on the technological capability of CAE and leveraging into specific high-value areas like this -- what we've been talking about this single synthetic environment. This is the ability, as you know, Benoit, very well, that we do very well is to be able to mimic the world, create a digital twin of the world in which people can exercise, and that becomes very, very important. And you heard me talk about this before, as the nature of training changes because the defense priorities are changing. We've gone from -- if you look at the defense priorities of the United States, for example, strategic priorities, they've switch from what used to be. We've talked for years about supporting the kind of threats that are -- those that we saw on what was called the war on terror. Now what people are focused on is training for fight a near-peer point, which is important that you cannot be assured that you have control of the air, control of the airwaves, control of the space assets. So you have to train, you obviously -- heaven forbid, never have to deal for real if that happens. But what does the military do when they're not in conflict? Well, they train for conflict. So you obviously can't train for fighting a near-peer threat. But -- so what we do is provide in artificial world, a synthetic world, the digital twin of the world in which you can exercise, where all the domains come together, the air assets, the ground assets, the naval assets, the space assets, the cyber environment. Those are the things that are going to be -- are actually becoming what is required to be able to support training. And we have a leading-edge capability, and we are winning contracts in that area. Like, for example, the one we're winning with USSOCOM global situational awareness. So -- and again, as we always do at CAE, we're an innovation powerhouse. We continue to invest in differentiating technology. So you heard us talk about CAE Tracks, the e-series visual system, all of which support the thesis I have just mentioned. Again, near-peer challenges that affect our ability to raise margins now. Near term, basically, issues with regards to order activity because COVID related, but it's a transition. It doesn't change anything about my bullish stance with regards to the future of Defence. -------------------------------------------------------------------------------- Benoit Poirier, Desjardins Securities Inc., Research Division - VP and Industrials, Transportation, Aerospace, Industrial Products & Special Situation Analyst [42] -------------------------------------------------------------------------------- Okay. And on Healthcare, Marc, you've been quite successful with the ventilator and air sanitizer opportunities. I would like to hear more about what type of revenues are sustainable? Or what would you see as a permanent result? And also what kind of opportunities you have aside this air sanitizer and ventilator because it might open the door for more opportunities for seeing down the road for Healthcare? -------------------------------------------------------------------------------- Marc Parent, CAE Inc. - President, CEO & Director [43] -------------------------------------------------------------------------------- Well, I think the ventilator contract is coming to an end. As I said, over the next couple of quarters, I think that will be done, but we'll produce the rest of 4,000 odd units that we have remaining to go. The purify contracts, I think, look, it's a huge numbers because these things to maybe $5,000 a piece, if I look, on an average. So it's not big numbers, but it is important, it is important. The technology beyond those, I think, is very exciting and I think it has potentially even beyond COVID-19 in terms of its capability to literally eliminate bacteria right up to black mold, for example. But again -- so we'll see if we can get more of those. Beyond that, I would say, as I was saying to Cameron, our strategy hasn't changed. We see growth in Healthcare -- significant growth in Healthcare through Santor knitting, which is simulation-based training and services in the Healthcare sector. And that's going to be fueled by our digital capabilities, which, as you know, as we all live, digital is not -- is being incredibly accelerated during this pandemic, and that will continue. And we have very, very specific skills and capabilities there that I think will propel not only Healthcare, but the rest of our business. -------------------------------------------------------------------------------- Sonya Branco, CAE Inc. - Executive VP of Finance & CFO [44] -------------------------------------------------------------------------------- And maybe I'll just add, Marc -- sorry, Benoit, I'll just add that this is a manufacturing contract. So we're not actually selling it directly to those client. And ultimately, from a CAE perspective, although really important, it's not that significant from a financial perspective. -------------------------------------------------------------------------------- Benoit Poirier, Desjardins Securities Inc., Research Division - VP and Industrials, Transportation, Aerospace, Industrial Products & Special Situation Analyst [45] -------------------------------------------------------------------------------- Yes. Okay. That's great color. And maybe a very quick one for you, Sonya. When we look in terms of financial perspective, what would you like to see before reconsidering or revisiting your dividend and buyback program? -------------------------------------------------------------------------------- Sonya Branco, CAE Inc. - Executive VP of Finance & CFO [46] -------------------------------------------------------------------------------- Yes. I think it's -- like we've said, the capital allocation priorities have not changed. The first priority remains to invest in accretive growth. And as we've seen with the 3 acquisition actions in the quarter, and we continue to see opportunities on the organic growth capital front, and we balance that with maintaining a solid financial position. So the current returns, dividends and buybacks, it's always been a function of the level of excess free cash flow and the level of accretive investments we see ahead of us. So it remains an ongoing dialogue with the CAE Board. -------------------------------------------------------------------------------- Andrew Arnovitz, CAE Inc. - Senior Vice-President of Strategy & IR [47] -------------------------------------------------------------------------------- Operator, that's all the time we have for members of the investment community. We do want to take the last few moments that we can to open up the lines to members of the media. -------------------------------------------------------------------------------- Operator [48] -------------------------------------------------------------------------------- (Operator Instructions) Sir, it appears that currently, there are no questions from the media sector. I'll return the presentation to you once again. -------------------------------------------------------------------------------- Andrew Arnovitz, CAE Inc. - Senior Vice-President of Strategy & IR [49] -------------------------------------------------------------------------------- Okay. Thank you, operator. We'll then conclude this call for CAE's third quarter fiscal year 2021. I want to thank all participants and remind them that a transcript of today's call can be found on CAE's website. Thank you, and good afternoon. -------------------------------------------------------------------------------- Operator [50] -------------------------------------------------------------------------------- Thank you. And that does conclude the conference call for today. We thank you all for your participation and ask that you please disconnect your lines. (foreign language) Have a great day, everyone.