CAE Inc (CAE) 2008 Q1 法說會逐字稿

Welcome to the CAE first quarter conference call. Please be advised that this call is being recorded.

I would now like to turn the meeting over to Mr. Andrew Arnovitz. You may proceed, Mr. Arnovitz.

Thank you and good afternoon everyone. 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 the 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 will 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 31st, 2007. These documents have been filed with the Canadian Securities Commissions and are available on our website and on EDGAR They have also been filed with the U.S. Securities and Exchange Commission under form 40-S and are available on EDGAR. Forward-looking statements in this conference represent our expectations as of August 9th, 2007, and accordingly are subject to change after this date. Do not update or revise forward-looking information even if new information becomes available unless legislation requires us to do so. You should not place undue reliance on forward-looking statements. Robert E. Brown, CAE's President and Chief Executive Officer and Alain Raquepas, our chief Financial Officer, are participating in the call today. 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 investors, we will then invite questions from the media. For your convenience this conference call will be archived on CAE's website. Let me now turn the call over to Bob.

Thank you, Andrew, and thank you everyone for joining us today. Let me begin with some observations about the first quarter and then Alain will take you through our results more specifically. Following that I will conclude with a few words about the way forward. In summary, we are off to a solid start for the new fiscal year. Our financial performance in the first quarter continued to reflect a sound strategy and good execution from all business segments and is in line with your plan. Revenue increased 19% over the last year to $358 million. On an equivalent basis, net earnings from continuing operations increased 25% to reach nearly $39 million. This quarter we received $308 million in new orders. We now have a backlog of approximately $2.6 billion. In simulation products civil we announced orders for13 full flight simulates during the quarter. This includes our second simulator order for the new Boeing 747-8 Freighter, this time from Cargolux, the launch customer for this aircraft.

Since the end of the quarter, we have announced another three new simulator orders. This includes an Airbus 833340 for the FAA which plans to use the simulator to identify ways of improving the safety of the increasingly crowded U.S. national aerospace. We also announced orders from Air France, the first-time customer Virgin Blue, as well as an order from Japan Airlines for a suite of Boeing 787 maintenance trainers.

We recognized 52% more revenue this quarter compared to last year. We also achieved double digit growth in our operating margin which reached 17.4%. Training and services civil won more than $66 million in new training contracts during the quarter. We broadened our relationship with another aircraft manufacturer by signing a 20-year agreement with Bombardier to become its authorized training provider for the Global Express and Challenger 300 aircraft. We marked an important milestone in India with the government's selection of CAE to provide pilot training and P school. The Indian government's decision to work with CAE validates our unique ability to bring the highest standards of aviation training to this fast growing market. It also recognizes our capability to develop the infrastructure required to address the need for pilots. Since the end of the quarter, we marked another important milestone by signing an agreement with Air Canada to provide training center operations services to the airline. We provide similar services to a number of airlines around the world but this is the first for CAE with a North American legacy carrier.

Average annualized revenue for simulator in the first quarter was $3.6 million on a base of 105 revenue simulator equivalent units. Training demand continued to be strong and revenue increased by 13% year-over-year. Compared to the already strong fourth quarter, revenue increased by 3% despite the sharp rise in the Canadian dollar during the first quarter. Our operating margin for the quarter was 20.7%. In the combined military segments we secured $76 million worth of contracts for a range of programs including training systems and upgrades for the German, U.S., and British forces. In Canada, we renewed a support services agreement related to the Canadian forces CF-15 In the United States we were awarded support contracts for the Air Force's C-130J and the Army Special Forces Little Bird as well as Chinook helicopter simulators. Since the end of the quarter, the U.S. Navy experienced and exercised an option for CAE to design another MH-60R helicopter simulator.

CAE's access to global markets in both military and civil segments is unique. during the quarter we signed an agreement to acquire Macmet Technologies in Bangalore, which we expect to provide CAE with greater access and additional capabilities in the fast growing Indian market. This acquisitions builds on our already long history in the Indian market and demonstrates our commitment to serving both military and civil markets in that region. On a combined basis, military revenue for the quarter was up 5% and operating margins reached 12.4%. With that, I will ask Alain to take you through our financial results.

Thank you, Bob, and good afternoon everyone. In the first quarter consolidated revenue was $358 million, up 19% from last year and mostly from organic sources of growth. The consolidation backlog was $2.6 billion. Our book to sell ratio was 0.9 times for the quarter and 1.1 times for the last 12 months. Net earnings were 38.7 million or $0.15 per share compared to 32.4 million, or $0.13 per share, in the same quarter last year. Excluding non-recurring items earnings per share from continuing ops were $0.12 last year. foreign exchange movements are a fact of life for CAE and we've been effective at managing our business within this environment. That said, the 7.7% appreciation of the Canadian dollar in the quarter against the U.S. dollar and the Euro had a notable impact on our consolidated balance sheet. Our net assets, located abroad and self sustaining entities, were reevaluated downward by 59 million. The impact of this adjustment is recorded on the balance sheet as required by the new chapter on comprehensive income. We also implemented during the quarter the new standards on financial instrument and hedges as mandated by Canadian GAAP since April 1st. Overall, foreign exchange movements did not have a material impact on the P&L during this quarter.

Income taxes were 16.7 million, representing an effective tax rate of 30% compared to 25% last year. We expect the average rate for fiscal 2008 to be about 30%. We generated free cash flow of 10.7 million in the quarter which is partly the result of a positive contribution from our non-recourse financing. As well as we generated 69 million of cash from continuing ops, but this amount was more than offset but a reversal of 97 million in working capital accounts. We normally anticipate a reversal in working capital at the start of CAE's fiscal year. Our first your is always impacted by cash payments for taxes, royalty, and worldwide employee incentives that are accrued during the prior year. Additional cash disbursement this quarter involved down payments we've made to major suppliers. This follows recent long term deals that our global strategic sourcing group negotiated in order to get volume and price discounts. Another notable difference this quarter relates to the increase in our accounts receivable. We reached a number of contract milestones late in the quarter for which we've only recently issued invoices to customers. As you know, we've been able to pull out a significant amount of cash from working capital over the past three years, and we're committed to keeping the same focus and we expect that a good portion of the 97 working cap reversal will come back over the balance of this year. Thank you for your attention. And Bob, I'll turn back the microphone to you.

Thanks, Alain. We see strong evidence in the market that our strategy is on the right track. On the civil side, we are particularly encouraged by the rate of activity at the recent Paris Air Show. Aircraft demand has been strong so far this year and combined, Boeing and Airbus backlogs are up more than 15% since the end of 2006. Market analysts estimate these major OEMs have more than six years of backlog at current production rates. Business jet demand also remains strong with a book to bill ratio in that segment well over 1 time. Taken together, these conditions provide us with additional confidence in the current cycle. We secured $105 million U.S. of non-resource financing this quarter in support of our growth in aviation training. This demonstrates that we can finance the business on the strength of the training assets and the expected cash flows.

We are now in the process of building and deploying simulators to grow our training network by approximately 10% per year. We expect to see the benefits from these investments in fiscal 2009 and beyond as we ramp up the utilization of this new capacity. Our CAE 5000 and 7000 series full flight simulators offer the highest fidelity solutions available on the market and our sales campaigns are doing well. It is still too early in the year to provide a precise number, but with 16 sales announced to date, we continue to feel that 30 sales for the year are well within our reach.

On the military side, we expect continued modest revenue growth and another solid year for orders. We are currently pursuing a large number of programs and in particular we expect new opportunities to arise from the ramp up of NH-90 programs in Europe and around the world. In North America, we are hopeful that CAE will have an opportunity to play a role in support of the Canadian air lift program. The rapid increase in the Canadian dollar over the past quarter is challenging. No company can adapt its business overnight to keep pace with the surging dollar, but we are increasing our efforts to find additional opportunities for cost savings and new ways to improve our processes over time. I'm confident that we will find an approach to this problem. We are nearly halfway through our second quarter and our priority remains the execution of our business plan and the redeployment of our growth initiatives. We are making good progress in all areas of our business and we intend to maintain our positive momentum. Thank you for your attention. We're ready now to take questions. Andrew?

Operator, we'd now be pleased to take questions from analysts and institutional investors and following that we'll take questions from the media. Before we open the lines, let me first ask that in the interest of fairness that you please limit yourself to a single one-part question. If you have additional questions after that and time permits, please feel free to reenter the queue. Operator, please go ahead.

Thank you. (OPERATOR INSTRUCTIONS) Our first question's from James David from Scotia Capital. Please go ahead.

Good afternoon all. Bob, do you feel comfortable that your civil simulation products business, you're now in that 100 plus run rate is that something we can expect pretty much for the next few years on a quarterly basis that you're in the 100 million plus more range every quarter?

I feel that the business is doing quite well and as we look at the backlog and we look at the orders that we've announced, and if I look at the activity level in the marketplace, it's quite good. It's very good. So I think that as we always do when we get past the second quarter, I think we'll be able to provide a little bit more precision but I think that we're in the range of the number that you're talking about.

Okay. I'll get back in the queue.

Thank you . Our next question is from Nick Morton from RBC Capital Markets. Please go ahead.

Good afternoon. I wondered if you could talk about the military segments and how you can accelerate the growth there. It seems good numbers, but sort of modest growth and I wondered what ideas you have to accelerate that?

I think, Nick, here we've always talked about modest growth over time in this segment. I think some of the things that will help us are these NH-90 contracts that I think, is it 11 or 14 countries have bought the NH90. The program has been a little bit behind but it's starting to catch up now. I think we're going to see some of the the military, or defense forces around the world starting to place orders. I think that is clearly one thing that will help us. The other thing is getting involved on a number of platforms. And I think that there's some things that we've done here to get us involved at the early stage on some new things that are coming forward. So I think that's another way that we're going to be able to do it. There's the Canadian government program and the offsets. If you know we can get some traction there we should be able to again help our backlog. And I think one of the things that we're seeing is that while there's been a lot of activity in the United States, which I think will continue, bit it'll be more modest than it's been in the past, there's a lot of expansion that's taking place globally around the world. And if you look at our global footprint that we have on both the civil and the military side I think that we're well placed to be able to participate in some programs. So I think those are some of the ideas that we have and the one last thing I would add is our R&D program that we're undertaking hopefully is going to keep us in the forefront of the industry and therefore it will be seen as an essential partner for people as they're bidding and I think the one other area is the modeling and simulation where we put Multigen Paradigm, Kessem, all of those things hopefully we'll start to be pulling them together and be able to grow them a little bit. So those are some of the ideas that we have.

Okay. But mostly internal ideas rather than, you did mention a bunch of smaller acquisitions, but nothing dramatic planned.

No. I don't think that we have -- we've been able to steadily grow this business with bolt-on acquisitions and as well by looking very closely at ways that we can get on new platforms and grow and expand internationally. And I think that's the way to go. It's served us well and we've been able to grow using that method.

Great. Thank you very much.

Thank you. Our next question is from Ben Cherniavsky from Raymond James. Please go ahead.

Good afternoon or good morning out here. I just have a couple points of clarification I'd like you to maybe comment on with respect to your margins in two units. The training -- the civil training business, the EBIT margin was done from last year and you do make a brief comment in the press release that it had something to do perhaps with something that was in the previous quarter. I don't have the quotes here in front of me. But can your just remind me what happened there in the first quarter of last year that made the margin go down into this year? Or is this partly a reflection of reconfiguration of your simulator fleet and still moving things around where you're not really optimizing your margins?

I think, Ben, here it's a couple of things. One, it's programs that are finished and they're all different. They're all individual programs, each simulator. Some have different margins. If you look at it over time, it'll even out but some are better, some are different. And I think also last quarter we included a contribution for the sale of a used simulator. So I think there were some elements of that kind that really resulted in that.

So, and I know you guys don't like to give guidance but just in terms of trend, is the fact that it was down year-over-year is that a trend or should we expect it to be stable for the year? Is that just a quarterly anomaly? Things are going to improve a little bit.

I think that you're going to see things maybe over time are going to improve a little bit. We're deploying a lot of simulators and we're also doing the ramp-up of the northeast center so you don't expect it to come on track immediately. It takes a little while to get all the sims filled. So you're seeing some the impact of that as well.

Okay. Thank you. And if I may on a related question just with the training business in military, the press release said that last quarter you had a one time payment. I recall that. But excluding that payment, margins would have been flat and I can't quite reconcile that. Maybe I've got the wrong number for last year. But if I normalize last year's margin it was more like a mid teen operating margin. I wonder if maybe one of can straighten me out on that.

Alain, can you?

As you said, Ben, there was couple of non-recurring items in the quarter last year. I recall AVPN payments. So really the 23% margin we had last year was driven by these exceptional items.

Right, and if I take out what I think was $4.5 million roughly for that payment, the margin works out more to be about 15%. Which is more, I think, in line with where the business is sort of normalized, but it's not, as you say in the press release, flat with this year. This year would have actually been down from that. I'm just trying to get a sense of trend for the year. Is there anything that's leading the margins lower or is this again another anomaly here?

As you've seen looking at history in this segment there's alway major variation from one quarter to the other rates than the one we get, the government rate adjustment it has an impact on the margins. So for the year, I mean it's what we have this quarter is a good indication. So --

This is a good indication for the year? Which would mean lower margins in the coming quarters as well.

No.

You did 11.5% in that unit this quarter.

I think that if you look at it over the year, Ben, I think you'll see that we'll probably perform in the way that we have in the past.

So it shouldn't be down in the coming quarter. It should be more stable.

It should be more stable.

Okay. Great. Thank you very much.

Thank you. Our next question is from Marko Pencak from GMP Securities. Please go ahead.

Thanks, good afternoon. Alain, could you talk a little bit about the profile of your FX hedges, because my understanding is that for your contract, you do go and hedge those at the time of receiving it and so you talked about the rising Canadian dollar being a challenge. But, I'm really just trying to understand based on the timing profile of your contracts and the hedges you've established can your just give us some color as to how that should play out?

Yes, I think we've, Marko, in the past we've given some sort of sensitivity about this. Like you said, we're hedging every contract that comes in USD or Euro as they are won. And so the backlog is fully protected. The sensitivity that we provide on this Indian DNA I think last year was on the unhedged portion. It was 1.8 million percent and on the hedged portion it was like half a million dollars overall. And these numbers are relatively good numbers to continue to use Marko. We've not feeling all the sensitivity but I think it's probably still valid.

I guess what I'm trying to understand, I can look at your order intake per quarter and just sort of assume an average rate for that quarter, but what I don't know is what the delivery profile of those orders that you receive in any given quarter is. Would there be any sort of particularly big orders that you would have received that are going to have a more extended delivery time so that we won't get any sort of severe volatility in that?

They are all hedged so there shouldn't be any change in them. I think it's more, Marko, our capability to bid competitively going forward with a different exchange rate and therefore cost structure. And that's where we're working, as I sad, very, very hard to make sure that we can absorb those changes and still be able to bid competitively. Which essentially we've been able to do since we started the restructuring when the dollar was somewhere in the mid-to low 80s.

Great. Okay. Thanks.

Thank you. Our next question is from Richard Stoneman from Dundee Securities. Please go ahead.

Yes, good morning, Bob. Bob, in the first quarter of last year the average revenue per simulator equivalent unit was 3.4 mil. This year it's 3.6 million in the first quarter. Does currency change affect that number? And is the average revenue per simulator -- are you able to get more at this point in the cycle or are you still running with the same charge out rate as you were a year ago?

Richard, Bob, if I might help you. You're right, when you do the revenue percent you see an improvement and when you neutralize it for the FX there was a big change Q4 over Q1. But Q1 over Q1 we were in the same sort of water in term of effects. So the 200K improvement that you referred to earlier on percent, is an indication that the getting more revenue on a revenue simulator equivalent unit. FX neutral. So, your conclusion is right.

Thank you very much.

Our next question is come Tom Varesh from Canaccord Adams. Please go ahead.

Good afternoon. I was wondering if you'd be able to provide us with the net gain or loss you had on your FX hedges?

Net gain or loss on FX hedges. I don't --

As you know, the contract we have are hedged and to protect the margin we have in the contract, so it's neutral.

There's no gain or loss. Are we understanding the question correctly?

Yes, you're understanding it correctly. So there was no gains or losses?

Everything that's hedged is hedged at the level and we don't change that.

Okay. Thank you.

You're welcome.

Thank you. Our next question is from Jacques Kavafian with Research Capital.

Good afternoon. I had a question on margins that has been answered. Thank you.

Thank you. The next question's from James David from Scotia Capital. Please go ahead.

Just very quickly I have a question after that. What's the rationale behind, and I'm not challenging it, I'm just curious, behind including the non-recurring financing in terms of the presentation of your free cash flow?

Let me take that one, Bob, if you permit. As you know, James, in the past all of our growth capital expenditure were pulled out of the free cash flow. Normally free cash flow you would pull out only the main CapEx. Because when we're providing free cash flow indicator we include all the CapEx, I think it's only fair when we are able to raise financing against these growth CapEx that we put it in the equation. So that's the rationale.

Okay. Bob, when you were talking about the military, you didn't mention NH & ID and I think I saw trade press recently talking about delays due to some weight issues. I'm just going to make the presumption that none of that is news to you, that this is stuff that's been articulated over a long period of time and so that you're well positioned in terms of your expectations for what kind of NH & ID activity you're going to see.

I think we're well positioned and we have a joint venture activity here with [Sallis] on the equipment and on the services.

But you're well aware, though, of all these delay issues that they're talking about?

Oh, yes, we're aware of all of that stuff and it's not going to have a negative impact on us. It's just more a case of some of the orders moving a bit to the right and I would say if you look at the delays, if I understand correctly, they're mostly on the maritime version, they're not in all of the versions. So we'll see how that works out over the next year.

Have they at all affected the flow of activity from your German contract? Have the funds come in as that was originally hammered out?

Yes, I think pretty well. I don't think there's much that's changed there. What it really does is we've thought some of these might come earlier. We've had to fill in, we've had to really work hard to make sure that we keep the order backlog up which we were able to do last year and so, I think there's a chance that maybe one or two will come some time this year. We'll see what happens. And we're still plugging away on all the bread and butter stuff that we've always done. This is -- we always say this is a business where the order intake is very uneven and we don't have much control over it. We just have to keep working at it and we feel good that we're going to win our share.

Okay. Thank you.

Thank you. The next question is from Benoit Poirier from Desjardins Securities. Please go ahead.

Yes, good afternoon, gentlemen. My first question is related to the environment in the U.S. Do you see a pickup of interest from legacy carriers for simulators given they are now profitable and out of Chapter 11?

We've seen some activity but not a lot yet. Quite frankly I would describe it as being spotty. There's nothing very consistent. They've still got to move decisively on some orders and they've got to, some of them still have to move out of Chapter 11. So, again, it's not something we think the contribution this year might be modest in this area and that's quite frankly why we're waiting until later in the year to see where we might get to when our total count of simulators. When I say we're feeling good about the getting to the 30, I think that it's not counting a lot on much happening from the legacy people.

Okay. And with new agreements with Bombardier and Air Canada it seems there's a trend toward outsourcing a little bit. Do you expect U.S. legacy carriers to eventually follow the pace? I know labor is pretty strict there, but given the new environment and everything.

I'm hopeful we can do something. It's not included in our plan.

Okay. Thank you very much.

You're welcome.

Thank you. The next question's from Stephen Anderson from Cormack Securities. Please go ahead.

Good afternoon. My question's for Alain. Back to the FX question for one moment. In your recent sales of simulators, have you been able to protect or maintain the margins that we're seeing rolling through right now on a hedged basis?

On the recent campaign?

No, on the recent sales. Any simulators you have orders for last quarter and you have the orders in place and obviously, you're hedging. Are we seeing the same margins on those orders that we saw on the ones that are flowing through the income statement now that are hedged?

Generally, yes, we're enjoying the same sort of margin we're having.

And that's because of cost improvements, you haven't seen any pricing increases or not?

Absolutely, We're focused to the use cost and that's our way to counter the effects. That's coming from cost reductions.

And what about on the pricing side? Is there a chance that we'll see increases at some point? The market, obviously, it's not tight yet.

I wouldn't count on anything for price increase.

Okay.

We've got to control our own destiny here by reducing costs.

Great. Thank you very much.

Operator, I think that's all the time we have for questions from investors. We will take questions from the media.

Thank you. (OPERATOR INSTRUCTIONS) There'll be a brief pause while the participant register. The first question is from Mary Tyson from [Le Paiz] Please go ahead.

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Thank you. The next question is from Hugo Miller from Bloomberg News, Please go ahead.

Yes, good morning. I was wondering if you could recap what you were saying about demand from legacy carriers in the states. Obviously, they do have a little bit more money to spend now compared to a year or two years ago. Could your just recap what the demand is from the U.S. market?

I think the demand potentially could be quite large. First the companies have to get out of Chapter 11. They have to order the airplanes, they have to finance the airplanes. Once that's done, then we'll be in a position to proceed with proposing simulators for people that have been very good customers for us in the past. The only one we've really seen start to move has been Continental. It's basically I think the only one that's ordered a simulator since 9/11. And of course Air Canada has as well after their restructuring, they ordered a number from us as well. But I think we have to really wait and see. The ordering of the aircraft will come certainly before we get to finalize what we're doing on the simulators.

Okay. And just on the civilian simulators side, it seems like it's the European carriers although there's massive growth in India and China and right across east Asia for new airlines. The growth seems to be coming more from Europe than from Asia?

I think it's pretty even. I think that [FIDAS] going to be pretty even. It's everywhere but the United States basically.

Okay. Thank you.

You're welcome.

Thank you. (OPERATOR INSTRUCTIONS)

Operator, thank you, if there are no more questions, we'll conclude the conference call. I'd like to thank all participants for joining us today and to remind you of the archive of today's call can be found CAE's website at www.cae.com. Thank you.

Thank you. The conference has now ended. Please disconnect your lines at this time. We thank you for your participation and have a great day.