CAE Inc (CAE) 2007 Q1 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to the CAE first-quarter conference call. Please be advised that this call is being recorded, Thursday, August 10, 2006. I would now like to turn the meeting over to Mr. Andrew Arnovitz. You may now proceed, Mr. Arnovitz.

Thank you. Good afternoon, everyone, and thanks for joining us today. Before we begin, I need to read the following. Certain statements made during this conference including but not limited to statements that are not historical facts, are forward-looking and are subject to important risks, uncertainties and assumptions. The results or events predicted in these forward-looking statements may differ materially from actual results or events. These statements do not reflect the potential impact of any non-recurring or other special items or events that are announced or completed after the date of this conference including mergers, acquisitions or other business combinations and divestitures.

You'll find more information about the risks and uncertainties associated with our business in the MD&A section of our annual report and annual information form for the year ended March 31, 2006. These documents have been filed with the Canadian Securities Commission and are available on our website, www.cae.com, and on SEDAR. They have also been filed with the U.S. Securities and Exchange Commission under Form 40-F and are available on EDGAR. Forward-looking statements in this conference represent our expectations as of August 10, 2006 and accordingly are subjects to change after this date. We do not update or revise forward-looking information even if new information becomes available. You should not placed undue reliance on forward-looking statements.

Participating in the call today are Robert E. Brown, CAE's President and Chief Executive Officer, and Alain Raquepas, our Chief Financial Officer. Following their remarks, we will invite questions from financial analysts and institutional investors. Once we have concluded the question-and-answer period with analysts and institutional investors, we will then invite questions from the media. For your convenience, this conference call will be archived on our website.

Let me now turn the call over to Bob.

Thank you, Andrew, and thank you to everyone for joining us today. Let me begin with a few comments about our first-quarter performance, and then Alain will take you through some specific financial highlights. Following Alain's remarks, I will conclude with a few words about the way forward.

Financial results for the first quarter showed continued improvement across all business segments. Year-over-year we have achieved double-digit revenue growth, reaching $302 million. Excluding non-recurring items, earnings reached $0.12 per share, a 50% improvement compared to last year. Operating margins have also continued to strengthen overall with EBIT reaching nearly 16% on a normalized basis. Growth has essentially come from our existing base of business where until recently little investment had been made in new growth initiatives.

Market conditions are favorable, and we're seeing the benefits of a business that is operating from a solid financial base and with an effective structure. We have emerged from our restructuring a stronger and more focused company, and we are now concentrating on a number of new growth opportunities to take CAE to the next level. I will elaborate on one such initiative later on in the call.

First, let's look at the business segments and our activities for the first quarter. In Training and Services/Civil we signed a high number of new training contracts for $110 million involving commercial airlines in Europe and South America with customers like GOL in Brazil and KLM's Transavia in the Netherlands. The Business Aviation Training segment continues to be robust, and during the quarter we signed a total of 50 new training agreements.

Annualized average revenue per simulator was $3.4 million on a base of 98 revenue simulator equivalent units. Training volume increased in our network, but revenue remained in line with last year due to a 10% depreciation of the Canadian dollar against its U.S. and European counterparts. The first quarter is typically active for trading as pilots prepare for the busy summer travel period that follows. Utilization reached 83% in the first quarter. As we have said in the past, this is not the most important metric to follow, but it does give us a sense that things are moving in the right direction. Higher business volume and better business mix, meaning more Web training together with increased operating efficiencies, have helped us attain an operating margin of 22%.

In Simulation Products/Civil we announced orders for 8 full-flight simulators and other training devices during the quarter from customers in India, Asia and Europe. We have announced another two orders since the end of the quarter for a total of 10 year-to-date. Higher order intake in prior quarters is now translating into higher revenue.

Profitability continues to benefit from sharper program execution, synergies between our business segments and a better mix of programs overall. EBIT margins approached 15% in the quarter. For the combined military segments, we received $99 million of orders during the quarter, the majority related to training and services. For the combined military segments, our book to sales ratio in the quarter was low at .7 to 1. The two orders announced last week together with recent activity and the high number of active bids we have in place give us confidence that bookings should keep pace with revenue for the year as a whole.

During the quarter we won contracts from the U.S. Air Force to supply C-130J trainers and also to perform upgrade work on that platform. We booked a contract to supply a part task trainer in support of the Royal Australian Air Force's A330 tanker program, and we were awarded a contract from the German Air Force for a Toronado visual system.

Also, during the quarter, we licensed the use of our intellectual property to the UK Ministry of Defense as the authority looks beyond AVTS to future procurement solutions for its ground-based training requirements. On the services side, the Canadian forces renewed our contract to provide avionic software upgrades and support services for their CF-18 fleet. And finally, the UK Royal Air Force selected us to provide maintenance and support services for the C-130J training systems.

With that, I will ask Alain to take you through some of our financial highlights.

Thank you, Bob. Good afternoon, ladies and gentlemen. We are off to a good start to fiscal '07. In the first quarter, consolidated revenue was 302 million, up 13% from Q1 last year and up 6% from the most recent fourth quarter. This is mainly due to revenue increases in simulation products. Market conditions continue to improve for the Civil segment, and Military benefited from European programs like the NH90.

Net earnings for the quarter were 33 million or $0.13 per share compared to 21 million or $0.08 per share in the same quarter last year. Non-recurring items in the quarter included after-tax restructuring costs of 3.1 million for the ongoing redeployment of simulators within our global training network and the completion of the footprint reductions in Montreal. This charge was offset by a payment of 4.4 million from the UK government as a release of all claims related to the AVTS programs.

You may remember that in the first quarter last year we wrote down 5.9 million in deferred bid costs accrued on certain programs, 4.4 million of which related to AVTS. Finally, non-recurring items also included a 2 million tax recovery from UK tax losses. Adjusting for non-recurring items, earnings from continuing operations were $0.12 per share compared to $0.08 last year. The appreciation of the Canadian dollar since the first quarter last year was challenging, but we have achieved double-digit growth despite a 10% appreciation against the U.S. dollar and the Euro.

Total CapEx for the quarter was 41 million related mainly to ongoing investments in the Dassault and the NH90 programs. Our CapEx budget this year is higher than the 103 million last year. The precise amount of CapEx will depend on the decision about new growth initiatives and our ability to secure nonrecourse financing. To provide investors with a clear view of our operating cash flow performance and to continuously improve our disclosure, we have begun to distinguish growth CapEx and maintenance CapEx.

Growth CapEx involves investments that increase our capacity and that are expected to yield additional revenue and profits. This may include expenditures related to new business initiatives or the expansion of the simulator fleet within our training business. Approximately 75% of our total CapEx this quarter involved growth CapEx. Maintenance CapEx consists of expenditures like computer, plant machinery and equipment and an update on simulators.

As of the end of the quarter, we generated 59 million of cash from continuing operations. The level of payable and accruals decreased from year-end, resulting in a working capital reversal of 27 million. This together with the 41 million CapEx resulted in a free cash flow for the quarter of minus 5.5 million. Both the level of CapEx and the reversal of working capital are in line with our budget for the quarter, and we continue to forecast positive free cash flow for the fiscal year.

Thank you for your attention. Now I will turn it back to you, Bob.

Thanks, Alain. We expect to maintain the positive momentum we have seen both in terms of financial performance and our reorientation to grow. The civil training market continues to be competitive. We have been making good headway in developing our business and leveraging CAA's capabilities, brand and reputation. We are now focused on a number of new growth initiatives, the first being the CAE Global Academy which we launched last month at Farnborough. We have created a global alliance between CAE and various flight training organizations around the world in order to address the global shortage of pilots. Boeing has estimated that 18,000 new pilots will be required annually over the next 18 years. It is clear that demand for pilots is increasing globally. An acute shortage already exists in fast-growing emerging markets like China and India where infrastructure also needs to be established.

CAE is well positioned by offering a total array of training solutions and is ideally suited to bring infrastructure to these new markets. The CAE Global Academy is initially expected to see more than 500 cadets training through CAE network to receive their type rating certifications, which means more Web training revenue.

Over the next 24 to 36 months as the alliance expands to include additional partners and service to the emerging markets, we expect to train 1500 to 2000 cadets annually. This is but one example of the growth avenues we intend to pursue, and we plan to make additional announcements about our growth in the coming months. Conditions in business aviation are good, and trends in the commercial airline industry are improving. The primary driver of the training business is demand for air travel, which is experiencing modest steady growth in passenger traffic. Passenger traffic ultimately determines the required size of the global in-service fleet of passenger aircraft.

Aircraft require flight crews to operate them, and they are required to train at regular intervals just to maintain their currency. This segment of our business exists within the broader commercial aerospace cycle but is less dependent on the delivery of new aircraft in our Simulation Products/Civil segment.

Since joining the Company two years ago, I have noted that when people think of CAE, they generally think of commercial flight simulators. The Simulation Products/Civil segment today represents only about 25% of our total business, but it stands as a vital part of the total array of training solutions that we bring to the market. It is the segment of CAE's business that is most closely related to the commercial aerospace cycle, and we plan our strategy accordingly. Our priority in this segment is to continue to reduce costs and shorten delivery cycles for simulators, which increases our competitiveness and enables us to better meet customer needs. We have the benefit of more than five decades of broad reaching customer relationships and a strong reputation, and we intend to advance our suite of products to meet the evolving needs of the market at the highest fidelity and the best values solutions.

CAE's capabilities and products extend across all major commercial aircraft mix, including all platforms for Boeing, Airbus, Embraer, and Bombardier. We continue to expect to sell more than 21 simulators this year and next year, commensurate with higher aircraft deliveries worldwide. The timing of simulator orders will become more predictable as the year progresses, and we will continue to update you on our outlook.

In our Military segments, we are seeing a number of opportunities for which CAE is well positioned. We continue to expect modest topline growth and low double-digit EBIT margins. Our global military helicopter market is expected to be robust over the next five years, and CAE's rotary wing experience and expertise is valuable in this area. In the key U.S. market where our military business has approximately doubled over the past five years, we continue to see opportunities with all the U.S. military services and large OEMs.

We are also pleased to see Canada making a commitment to equip the Canadian forces with new transport aircraft and heavy lift helicopters, which we anticipate will provide opportunities for Canadian companies such as CAE.

In summary, we believe that our core markets are on sustained runs and that we can now capitalize on CAE's capabilities and restructured base. We will carefully consider new opportunities related to growth in our areas of core competency.

Thank you for your attention. We are ready now to take questions. Andrew?

Thank you, operator. We will now take questions from financial analysts and the institutional investors.

(OPERATOR INSTRUCTIONS). James David, Scotia Capital.

Just a few questions on military. If I understand your comments correctly, you did note the negative book-to-bill in the military equipment, military products, and we had a similar sort of pattern last year, but you expect the full year to be a ratio of 1 to 1. Should we expect that it will again be kind of bias towards the fourth quarter, and why does that pattern sort of repeat itself?

I think that if you look at the orders taken since the end of the quarter and where we are right now, we're basically in line with where we expected to be, which is the first quarter that we were a bit behind. You would find that the end of the fiscal year in a number of governments at the end the March which tends to coincide with the end of our year as well, and most governments, they have policies that you either use it or lose it. So I would tend to think that they may be more coming towards the end of the year, but I think you're going to see some good activity as well in the second and third quarters. I feel quite confident we're going to get there for the year.

So somewhat of the same pattern we saw in fiscal '06?

Yes, I think so.

And just on the AVTS, I think it was about a year ago at this time where they opted to step back from the PFI structure in the UK. Do you have any indications of where they are headed in terms of how they want these programs bid, and does it change the way -- will it change the way you guys run your business?

It won't change the way we run our business. I think they are reassessing the way forward. What we found encouraging was the purchase of some IP from us that allows them to evaluate the way forward and the way that we had looked at the project. So there is nothing in our plans in the short to medium-terms that relate to AVTS.

Richard Stoneman, Dundee Securities.

The first question, in terms of the civil training business when you X out the appreciation of the Canadian dollar, your revenues per simulator were up almost 10%. Is that due to utilization pricing or the introduction of Web training?

I would say that you are correct. It is up about 10%, and I would say most of it relates to the transformation to Web training.

Thank you. And the second question, Bob, is historically smaller simulators manufacturers outside of CAE and Thales have got about 10% of the market. Do you see this changing this cycle, or will it stay about the same?

It is always difficult to predict the future. In a strong market, you always expect some of these players to be there. You know I think it could stay around the area that it is in right now. You notice that what we have done is we have focused very very clearly on making sure that the simulators that we build we make money on. You are seeing that on the bottom line, and we have been able to do that and still growth.

So that is how we started. When we started this journey as it related to the restructuring, we were determined not to get ourselves into the hole that we were in before, and I think the Simulation Products business has done a very good job in doing that. So I hope that helps as a response for you.

Nick Morton, RBC Capital Markets.

Two questions. On page 11 of your release, you talk about changes to multigroup pilot license requirements and how that would be positive for your training business. I am just wondering if you could expand on that?

Well, there is a standard process now for getting a license to be a pilot. Basically you go through training in a small training school. You then log a certain of number of hours that you would have on a certain -- on a wide variety of airplanes, and then you get a pilot's license, and then you would get basically a certificate to fly the type rating on a certain kind of airplane. This new concept that is being looked at is to bypass a lot of that and do much more training in simulators and be able to have a pilot trained specifically to operate a certain type of aircraft. So it is a change in the approach of providing a pilot, and this is something that is being looked at with the authorities in the various jurisdictions as a different way of providing pilots and to meet the shortage requirements that are out there in the marketplace.

Okay. And in China and India, do they require their pilots to be retrained on simulators that are refreshed as often as they do in North America and Europe?

Yes, I believe so. We would have to check that. I believe that --

It may be an unfair question for --

No, I believe they do, but perhaps we could come back to you. I think they do.

I missed the first two or three minutes of your call today, and I apologize if this was answered. But you have a note on page 16 of your release talking about sales in the marine controls division and some subsequent payments and I guess a lawsuit. I just wondered if you could comment on that?

The question was not asked before. I think we have disclosed that the 18 month period ended August 3 for L3 to make claims on this business, and they -- as normal in these kinds of transactions, there is a couple of claims that have been made. So we have noted that to people. And in the way that the deal was done with L3, we had a cap on this of $25 million. So it is something that probably will be arbitrated or dealt with over a period of time similar to other sales that we have had.

Okay. So relative to the size of the transaction, it is not really significant?

No, I don't think it is really material, but in line with what we have been trying to do, we're trying to disclose things as they occur so the market is aware of things as they are unfolding.

Okay. On acquisitions do you have any size limit or comment to make on potential acquisitions?

We have the same approach. We have a lot of growth initiatives on inside the Company from indigenous growth capability potential that we have, and where we can support that with small acquisitions we will do that. But we have not been looking at anything that is this large.

Operator, before we take the next question, I would just like to remind callers to limit themselves to one question, and should anyone have additional questions and we have time leftover, feel free to re-enter the queue.

Cameron Doerksen, Versant Partners.

I just wanted to see if you could expand on the industrial offset opportunities related to Canada's purchase of new military hardware. Obviously you are very well situated on some of the reported aircraft that may be purchased by the military. I am just wondering if you're actually in discussions with any of the OEMs on what industrial opportunities there may be for you?

Yes, we are in discussions with -- I think everybody is in discussion with everyone right now. If you look at the various platforms, it will depend on where they end up. But I think on the helicopters, and I will just use it as an example because I don't know what the final selections will be. But the CH-47 Chinook we're well situated on that. We are think the preferred supplier around the world. The 130 we have the same situation with the Lockheed platform. The C-17 that I think it is really the quantity of the aircraft being purchased, it is much more likely there is going to be indirect benefits on this as opposed to direct involvement of any kind. So we're looking at all of these and talking to the potential suppliers, talking to the governments, and we will see where we end up. I'm optimistic that we will have some participation.

Marko Pencak, GMP Securities.

Bob, I was curious about your comment that it is something along the lines on the Civil equipment side, sort of the visibility on additional orders would get firmed up towards the end of the year. I'm just curious, is that a function of aircraft deliveries for specific airlines? Is it a function of your expectation of airlines that you've got a better historical relationship with, rather than others, or why is it getting better as opposed to where it is today? I'm really just trying to get a sense of that.

I think that we are -- how many have we done now before the end of the year? (multiple speakers) We have done 10 so far, and I think there's a number of discussions underway. I think what we're trying to see here than many thing, I'm trying to be prudent, and I really don't want to say that we are going to -- how much we are going to do more than the 21 until I feel full quite confident that we're going to do it. It is very much the same approach that we took last year, and so I think you will see at the end of the next quarter, we may be able to be in a position where we can make a more definitive comment about where we think we might end up at the end of the year. But I think generally things are going quite well.

Just a quick question about your market share. It sort of slipped from historic levels. I know the 787 Thales and Alteon deal has got a lot to do with that. But can you give us a sort of view on your market share expectations?

Well, I think we will have more than 50%, but you know here we are focusing on making money, growing revenue and making money. That, you know, is a real discipline that we need to have, and the market is competitive. We clearly still have the best product out there, but we are not going to get ourselves in a situation where we are losing money. We have made huge strides in terms of reducing our costs and reducing our cycle times, so I think we're quite well positioned.

[Terrin Malick], Westwind Partners.

I am calling on behalf of [Horace Tunakin] who is out of the office today. I had a question on your military operations. You mentioned several European contracts which -- about their growth. I was wondering if you could comment on the U.S. side? Are you seeing delays in procurements at all as the U.S. military concentrates more on primary systems for theater wall operations going on right now or the potential gains for your systems such as that you provide to special forces in the U.S. military fights more of an unconventional war?

We're not seeing any let up in the United States market, and particularly in terms of the special forces, we are clearly not seeing anything there at all. I think the activity (technical difficulty).

Do you plan to see further growth on the special forces side as more of an unconventional war is fought around the world?

I think potentially there could be, but we already have a pretty strong position there. If we could just hold the position we have, I think we could be quite happy.

Steve Ricchio, Landmark Capital.

A question -- I may have missed this. Have you put out an estimate or what is the estimate for capital spending for this current year?

What we have said for capital is just continuing the activities that we have had in the past is likely to be similar to where we were last year, around 100, 135, but we're going to be -- we know we have said that we can be cash flow positive at that level.

What we have said is that with the growth initiatives that we have ongoing that we're likely to exceed the 135, 130 high number, and we will signal to the market as we go forward initiatives as we undertake them if, in fact, they are going to lead to additional expenditure. We have also said that we are seeking nonrecourse financing and a number of initiatives, and that is something else that we would signal to the market as a well as a way of managing our CapEx.

Okay. And the split you guys just -- and by the way, thank you very much for doing that -- in growth CapEx versus maintenance CapEx, could we expect a similar 75/25 split for the entire year?

I think from what we have in the file at this stage, it is probably a ratio that is a good ratio for the year.

Okay and one last question regarding CapEx. For your growth CapEx, what type of hurdle rate are you using to sort of justify those investments?

Our weighted average cost of capital is just around 10%, something like that. (inaudible). That is good.

Robert Fay, Canaccord Adams.

Just I had a couple of questions regarding the NH90. In the quarter, you recorded some -- you said you hit some milestone payments. Could you give us sort of an indication of the size of those milestone payments in the quarter and what we should expect through the rest of the year?

Do you have that, Alain?

Yes, the NH90 activity in the quarter was quite high. Like we have pointed out in the MD&A, the amount of revenue for this quarter in the quarter was around 17-ish million. So this can give you an idea that is the revenue that we book around NH90 in Q1.

Okay. And as we go through the rest of the year?

It won't sustain this space. Q1 was really a blip. There was a lot of activity like we have mentioned. There was a big milestone that has been achieved. I do not have my data with me, but I know it is not the trend. (indiscernible) not deal with 17 times 4 for sure for NH90 in the year.

And on the full-flight simulators, you recorded eight orders in the quarter. And when we looked at the revenue for the orders, it was 87 million. I think it was listed in your backlog number for the quarter. How did you record the revenue from those eight full flight simulators? Was it full price on them, or was it spread over another quarter?

It would likely be spread over -- I doubt if all the activity would be in one quarter of the revenue.

No, as you might know or might not know, Robert, we're taking percentage of completion as our (indiscernible) to recognize the revenue. So we have booked these eight orders, let's say, the cycle time is 14 or 16 or 18 months depending on the platform, and we would bring the revenue for these eight orders over that period of time in the P&L.

I understand that, but I guess what I look at is in the backlog, your calculation of backlog and the dollar amount, you showed 87 million of orders in the quarter.

Yes?

And that relates to the eight simulators?

Yes.

So that would suggest that it is less than 11 million Canadian per simulator?

Some of them, Bob, include what is called buyer furnished equipment where the buyer is furnishing the data parts and equipment (multiple speakers)

Which can be about half of the simulators, so you cannot do a correct translation.

Operator, if there are no more questions, we will now open the lines to media.

Media portion of call not transcribed.