CAE Inc (CAE) 2012 Q3 法說會逐字稿

Good day, ladies and gentlemen, and 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 know proceed, Mr. Arnovitz.

Good afternoon, everyone, and thank you 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 nonrecurring 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 forms for the year ending March 31, 2011. These documents have been filed with the Canadian Securities Commission and are available on our website at CAE.com and on SEDAR. They have also been filed with the US Securities and Exchange Commission under Form 40-F and are available on EDGAR. Forward-looking statements in this conference represent our expectations as of today, February 8, 2012, and accordingly are subject to change after this date. We 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.

On the call with me this afternoon are Marc Parent, CAE's President and Chief Executive Officer, and Stephane Lefebvre, our Chief Financial Officer. After comments from Marc and Stephane, we will take questions from financial analysts and institutional investors. Following the conclusion of that Q&A period, we will open the call to members of the media. Let me now turn the call over to Marc.

Thank you, Andrew, and good afternoon, everyone, joining us on the call. I'll first discuss some highlights from the quarter, and then Stephane will provide a bit more detail about our segmented results. I'll come back at the end to talk about some of the trends we see in our view of the way forward.

We had a good performance overall in the third quarter with higher margins in both our civil and military business units. We had continued strong order activity in civil, which helped to offset the delays in military, and we generated a good level of free cash flow. In civil, we continue to demonstrate CAE's strong competitive position. We have maintained our market leadership with 11 full flight simulator sales during the quarter which brings us to 30 after nine months. In civil training, we signed new agreements expected to generate CAD122 million in future training revenue including a long-term recurring training services deal with FlyDubai. We also announced that we are forming another new joint venture in Southeast Asia, this time with Cebu Pacific Air of the Philippines. For our combined civil business, our book-to-sales ratio reached 1.15 times in the quarter.

Looking now at defense, orders were lighter in the quarter than we expected. Not because business opportunities went away or were lost, but mainly because of slower contracting and procurement delays. Although predicting the timing of orders on the defense side remains a challenge, we booked some orders during the quarter with key defense customers in North America, Europe, and Asia. These included Tornado jet maintenance trainers for the German Air Force and the UK Royal Air Force and additional contract options for the P8 Poseidon simulators for Boeing and the US Navy.

In terms of downstream opportunities, we won upgrade work on the Canadian Force of simulators for the Hercules aircraft and Griffon helicopter. In Asia, we were awarded contracts to provide support services for an AW139 helicopter simulator in Malaysia and a multi-year helicopter training services contract with another key customer in the region. Combined military orders in the quarter totaled CAD124 million for a book-to-sales ratio of 0.56 times. Our military backlog remains over CAD2 billion, and our additional unfunded military backlog stands at CAD269 million.

In our New Core Markets segment, we continued to make good progress integrating our businesses and aligning our resources and structure for future growth. In mining, we made some inroads penetrating the market with notable new customers for our software solutions in Australia, Mexico, and Peru. And in health care, we gained additional credibility with the endorsement of our ultrasound curriculum and seminars from the Canadian Critical Care Society. As well, the simulation center we manage at Universite de Montreal received accreditation from the Royal College of Physicians and Surgeons of Canada. During the quarter, we sold patient simulators, courseware, and center management systems to customers in North America, Eastern Europe, and the Middle East. With that, I'll now ask Stephane to take you through the financials.

Thank you, Marc, and good afternoon, everyone. Revenue for the quarter was up 10% year-over-year at CAD453.1 million, and net income contributed to equity holders of the Company was CAD45.6 million, or CAD0.18 per share. Operating profit in the quarter was CAD77.5 million for a net operating margin of 17.1%. We had good cash flow performance in the quarter with free cash flow of CAD46.2 million. This was mainly the result of favorable changes in our non-cash working capital accounts and more cash provided by continuing operations.

Net debt was CAD593.9 million as at December 31, 2011, compared with CAD618.8 million at the end of September. The decrease of CAD24.9 million was mainly due to foreign exchange movements. Income taxes were CAD15.2 million representing an effective tax rate of 25%. The rate is lower than usual, mainly because of a settlement of a tax audit in Canada, as well as a change in a mix of income from various jurisdictions. On a normalized basis, our effective tax rate would have been 29%. Capital expenditures totaled CAD44.1 million this quarter, including CAD25.3 million in support of our growth initiatives and the balance for maintenance.

Now, looking at our segmented financial performance. In our Combined Civil segments, third quarter revenue increased 13% year-over-year, reaching CAD203.7 million. For the year-to-date, revenue grew by 18%. Our Combined Civil operating income for the quarter was up 31% to CAD42 million which gave us an operating margin of 20.6%. Utilization at our training centers increased to 73% from 70% last quarter and 71% last year, and our trailing 12-month revenue [received] later increased to CAD3.56 million compared to CAD3.39 million last year.

In our Combined Military segments, third quarter revenue was 1% higher year-over-year at CAD222.3 million. On a year-to-date basis, our military revenue was up 4% at CAD630.2 million. We generated 16.6% Combined Military segment operating margin in the quarter which brings our year-to-date margin up to 15.3%.

In New Core Markets, third quarter revenue increased from CAD11.1 million to CAD27.1 million, reflecting the inclusion of METI for a full quarter. We had an operating loss of CAD1.4 million in the quarter, mainly from integration and restructuring costs. Our operating loss was CAD12.6 million for the first nine months on revenue of CAD58.8 million. We are tracking our expectations for New Core Markets to become profitable in the next fiscal year. With that, I'll turn the call back over to you, Marc.

Thanks, Stephane. We are encouraged by CAE's prospects for growth in the period ahead. We are well positioned as a leader in our end markets, and in total, they are large and they are growing. The market drivers in civil aerospace continue to support our positive outlook for growth and higher margins for our combined civil business. Driving demand for commercial aircraft and aviation training solutions are the growth in air travel as well as the re-fleeting of legacy carriers. Last year, total revenue passenger kilometers increased by an average of 5.9%, and airlines added 6.3% more capacity.

Commercial aircraft OEMs booked more than 2,400 orders, up over 60% year-over-year. OEM order backlogs have now surpassed 9,300 aircraft, and air production rates are slated to go even higher. These factors have been translating into more demand for our civil aviation training products and services. With more simulator orders booked after nine months than we had all of last year, we are confident in our ability to reach our mid-30s target by March 31. Demand for commercial and business aviation training remains strong in all regions with the exception of the small cabin business jet segment. Industry experts predict a broader recovery in business aviation over the 12 -- over the coming 12 months which would present even more upside.

We are in a very good position within a growing market. We have well established relationships with the world's legacy carriers, and we have a strong presence in the emerging markets where growth rates for air travel are significantly higher than the global average. We have continued to be highly active, developing our business, strengthening our competitive position in legacy markets, and forming long-term alliances with key operators in Southeast Asia, the Middle East, and South America. Overall, in our Combined Civil segment, we expect continued good growth. We have sustained a 20%-plus operating margin over the last few quarters, and we expect this positive trend to continue.

Now, turning to defense, procurement process delays and program movements that are right have become the order of the day, resulting in contracts taking longer to conclude. The good news is that we are continuing to win our fair share of those programs that have been awarded, and we have yet to see any major cuts, even in the US defense budget preview, that would materially affect our business. Despite the delays, we still feel good about the market opportunities before us. We have identified a range of material contract prospects in our order pipeline which support our outlook for modest growth in our combined military business in the period ahead. Predicting the precise timing of orders on a quarterly basis remains difficult, but we take confidence in the fact that a large majority of these opportunities involve programs where we have already been down-selected or we are in exclusive negotiations. Taking all that into account, we fully expect that we can continue to replenish our backlog and to grow.

In addition to the visibility that our order pipeline provides, there's a number of fundamental factors that also contribute to our optimism over the medium- to long-term. We are globally diversified with 1/3 of our military revenue generated in the US where we continue to win programs on platforms with long legs and have thus -- and that have thus far proven to be resilient in the face of cuts. I'm speaking about platforms like transport aircraft and helicopters which serve defense operations and also humanitarian and nation-building roles. Another 1/3 of our revenue is generated in Europe where decisions about [fore]-structures are still not finalized, but where we expect to maintain a solid recurring business. The remaining 1/3 of our military revenue is generated in the rest of the world including the high growth emerging markets which are increasing defense spending in order to modernize their forces. Ultimately, we believe CAE is well balanced in terms of regional exposure, and we are on the right side of the equation by offering defense forces and governments a way to maintain mission readiness as a lower cost. By moving more of their training hours from aircraft to simulators, they can achieve recurring savings.

In New Core Markets, we are continuing to integrate our businesses and provide the necessary resources to develop a larger offering of solutions. We are on our way to meeting our goal to generate over CAD120 million of revenue next fiscal year and to become profitable. I am pleased with our progress so far, and I continue to expect New Core Markets to become as material to CAE in the years ahead as any one of our four other segments today.

To conclude, we are well positioned to benefits from a robust civil aviation market. We have a compelling value proposition in defense with visibility for continued growth, and we are making good progress to further diversify CAE for growth and profitability in New Core Markets. Thank you for your attention, and we are now ready to take your questions. Andrew?

Operator, we would now be pleased to take questions from analysts and institutional investors.

(Operator instructions) Our first question coming from the line of Hamzah Mazari with Credit Suisse. Please proceed with your question.

Yes, good afternoon. Thank you. The question is on the civil training side of your business. You have signed some new long-term contracts there in Latin America and Asia. Could you maybe give us a sense of what CAE accounts for right now as a percentage of the total lift, in say Latin America and Asia? And, whether these contracts are higher margin than your US training business? Is that fair way to think about this?

I think maybe just the latter end of your question, Hamzah, would be -- our training business in the US is largely business aircraft, not a lot of commercial. Some, but not a lot, and mainly because that legacy carrier mainly, and traditionally, they have done their own training. But, of course, we sell a lot of simulators there. We have got a leadership position there. So, it's hard to compare, and business aircraft, typically, is more profitable. But, if you look at it in the aggregate, I think we are doing well in the emerging markets. We have a -- we don't actually have solid metrics about how much of the lift we have. But certainly, I think we have leadership position in South America. We have a couple of centers from Sao Paulo, center in Santiago. We just opened up one in Mexico. An operation in Colombia. I'm not aware of too many other competitors that have centers there. So, you can -- we are tied up with -- we've got good contracts with the leading carriers such as Tam and Lam and [Gold]. I think we've got a good position. I just don't have any exact metrics, but certainly it would be in the high north of 50% -- 50% for sure.

Our next question coming from the line of Benoit Poirier with Desjardins Securities. Please proceed with your question.

Good afternoon. This is Etienne Durocher in for Benoit this afternoon. I had a question -- was wondering if you had seen any change -- sorry, to your outlook on the defense side since the last quarter. Since the last quarter, we have seen the five-year plans from the US government. So, just looking at fiscal '13, would you expect your Combined Military business from emerging markets to mitigate the potential downside from Europe and the US?

Our outlook hasn't really changed. The only big news that's come out since we last reported, I think is there has been an announcement of cuts at the US Air Force level, specifically, and when we look by program, you might note that they cut the Global Hawk program. They reduced a few C5s. They reduced a few C130Hs. But, nothing that would materially affect our business. We have looked at them all. So, it really for us -- the outlook is a lot tied to which platforms that we are on, and the platforms that we are on are doing well so far in the budget environment. We have no reason, even as I mentioned, when we look at the budget preview for next year, we don't see anything that causes us concern.

So, I wouldn't say anything has materially changed except that the reality is what you see is it's taking longer for us to conclude orders. Some of it is because it takes longer to -- for the procurement to happen. In established markets, procurement market is slow. Some of the regions where we are winning new contracts just take longer to conclude, and the timing of when they will make a decision sometimes just is longer and the process is different than, for example, in the US.

Our next question coming from the line of Tim James with TD Securities. Please proceed with your question.

Thank you, good afternoon. What do you believe builds certainty for the US and creates really the catalyst for decision makers to move forward with purchase decisions? I'm thinking specifically of what's going to drive them to increase the capitalization on the cost benefits of simulation? What are you hearing from your defense customers? Is it in the US the case, completion or passing of the fiscal year '13 budget? Or, what time frame do you look at for greater certainty?

Oh, certainty is difficult to get for anybody, I think, in this market right now because there's so much flux. There's -- as you -- as I'm sure you know, they have to -- they have to come up with pretty sizable cuts, which we saw the Air Force announce theirs. At least, the first part of what theirs will be, certainly, if that's not the end. And if they don't, there's always the risk of [secrestation]. So, I don't think anybody can predict what's going to happen. Certainly, I think we are not into continuous resolution. That's a good thing. So, I would expect that things will get easier, relatively speaking, in the next few months than we have seen in the past -- the past month that we have seen in terms of procurement agencies within the Air Force, the Army, the Navy -- being able to make decisions because we are at least in a new budget year. But, at a macro level, it would be -- it's almost impossible to predict.

Our next question coming from the line of Michael Willemse with CIBC. Please proceed with your question.

Great. Thank you. First of all, Stephane, I noticed there are some changes in the debt accounts. Just wondering if you've been able to make some changes to reduce your interest cost by a meaningful amount? I know there is some kind of discussion back in August of doing that further, where are you at with that?

We actually did. If you recall, when we did the METI acquisition last summer -- last August -- the transaction itself was for CAD130 million. And, at the time, we took CAD150 million at attractive rates, and we -- since then, I have looked at refinancing options. There's a couple of assets that were under lease that we refinanced in the third quarter. Those leases were at implicit rates at around 6% to 8%, and they were refinanced at using or -- the private placement we put in place last summer at 4.5%. So, we did some of that -- we've done that on two assets so far.

Thank you. Our next question coming from the line of Konark Gupta with Cormark Securities. Please proceed with your question.

Good afternoon, gentlemen. I'm in for David Newman here today. I have a couple of questions actually today. One, you said there was some integration costs of METI. Was it in Q3 at all? Or, was it just for the nine months because of Q2?

No. There was a little bit in Q3 as well. The bulk of it was in the second quarter as you have seen, but in the third quarter, the whole New Core Market segment shows a loss of CAD1.4 million. And, we've had -- but, the bulk of it was still in relation with some mix of integration costs as a result of the METI acquisition as well as some restructuring costs that we did in our mining business. So, a bit of both. But, we have got the -- around one point -- I think it's CAD1.3 million of restructuring costs that went through the New Core Market segment in the third quarter.

Okay. So, basically even without the integration costs on METI, this segment would not have been profitable, right?

Not quite.

In Q3.

Correct, not quite. Whereas I said -- as we said earlier, not quite at this point in time, but we -- as we mentioned, we are tracking well to meet the guidance that we had given of CAD120 million of top line next year and become profitable next year.

(Operator Instructions) Our next question coming from the line of Chris Murray with PI Financial. Please proceed with your question.

Good afternoon, gentlemen.

Hi.

Just quickly going back to the military side of things. You've talked a little bit about orders and bookings, but one of the things I'm trying to understand is relative to previous -- either previous cycles or previous years -- how is the actual sales and order pipeline developing? And, what I'm trying to understand is if there's a possibility that we will get maybe deeper into fiscal '13, and all of a sudden if there is some financing changes if all of a sudden we are faced with, call it, a year's worth of demand coming in a quarter or something like that? I'm just trying to understand if there's any sort of underlying changes in the buyer behavior relative -- independent of financing issues.

No, not really. The way we look at our order pipeline and trying to figure out -- are we going to grow, what's our outlook going to be for next year and all that is -- we typically go down and look at on a global basis in all regions what are the opportunities that we see in front of us. We quantify them. We go through a pretty rigorous process for figuring out how real is this in terms of probability of being able to be -- first of all, to happen from a financing point of view, from a government approval, from the forces actually needing the equipment. And, once we get to that, we typically want to have -- be in the position to have at least three times as many and from a quantum point of view dollars, put it, three times as many opportunities in the pipeline that were -- in order to be able to have some degree of likelihood of being able to achieve if you like the one.

So, if I look at today, that hasn't really changed. So, I see as much opportunities from a quantum point of view as I've ever seen, but it's taking long -- but the difference is, it's taking us longer to close. And, it has been a bit unpredictable. When I look at the immediate future, as I mentioned -- when I say immediate, I say next few quarters. When I look at the opportunities that are in front of us, I look at the -- because obviously, if you're looking forward you have a better likelihood of seeing -- first of all, the size of those programs and whether they are going to be funded or not depending on which programs they are. So, I feel good about a sizable number of good opportunities. That's why I'm pretty confident that we will be able to get growth, albeit modest growth, over the period ahead.

Our next question coming from the line of Omar [Allen] with National Bank Financial. Please proceed with your question.

Hi. Good afternoon. Just as a follow-up to the New Core Markets question earlier, what can we expect for restructuring costs going forward for the coming quarters? Or, is it more or less done?

No. Well, the bulk of it is more or less done. I think you can expect there may still be a few costs that are still to be incurred in the fourth quarter, but it's -- the bulk of it is really done now.

All right. Thank you.

Thank you. Our next question is a follow-up question coming from the line of Tim James with TD Securities. Please proceed with your question.

Thank you. In terms of the business jet market, you commented that the large cabin is still doing reasonably well, and the small cabin market continues to be a little bit slower. Overall, do you see the rate of recovery in your Business Jet Training segment as slowing at all? Is the year-over-year improvement -- has that started to moderate? Or, is it kind of similar to where it was at the beginning of the current fiscal year?

It isn't diminishing in terms of business jet training. In fact, in the last -- well, I hesitate to call a couple of months a trend, but we are starting to see demand slowly pick up. And, in the other segments rather than just large cabin. But again, it's very recent, and we -- I'm a bit hesitant because we have seen this before last year, and then last -- we are cautiously optimistic that what people are talking about, the industry experts, that the market is starting to recover and expect it to recover more materially next year may be right. But, I think it's a bit early, literally saying -- the demand as well is being fueled by other regions. If you look at the predictions of airplanes going to China, for example, it's astounding. Up to now, it has been mainly large aircraft, but I mean the demand is coming from around the world. But again, I'm cautiously optimistic, we are slowing -- we are starting to see a pickup, albeit a slow pickup. I think it would be interesting to see next few quarters, if it does really pick up materially. It's not slowing, though.

Our next question is a follow-up question coming from the line of Michael Willemse with CIBC. Please proceed.

Thank you. Just on capital expenditures with the hesitation you're seeing in the military, obviously you've still got some CapEx requirements in the training -- the civil training business. But, just wondering where you see that going directionally over the next few quarters? And, could we see a decent drop in CapEx as the military, [waits] itself out? Or, where is that going?

Well, I think military, as you know, has never been the most capital-intensive part of our business. As you mentioned, it's training. I think we are going to -- the investment that we are going to do in training is really fueled by our customers. The opportunities that we see in the emerging markets, specifically, and I think what you look at -- look at the joint ventures we have signed, the partnerships. You think about this year, AirAsia, Cebu Pacific, as a couple of notable examples. Most of the airplanes that going out of there -- of this year, I think of the 30 simulators that we've done, I think 21 have gone to Asia. So, we want to make sure that we seize the opportunity there to make sure that we grow with our customers and seize the business that's there. So, that's really going to be the pacing item for our CapEx. So, it's early to say. We are in our strap plan period now so by the time we get to year-end, we will probably as usual be able to give an estimate on what our CapEx will be. But, I wouldn't expect that the level that we are seeing material -- in military, would materially affect our ability to put CapEx in the rest of our business.

Our next question is a follow-up question coming from the line of Konark Gupta with Cormark Securities. Please proceed.

Hi, I just have a quick housekeeping question on the civil simulator production rates. You mentioned on the last call that the rate would be significantly higher this year, obviously, the number of deliveries, right? Is that still the case like you are already CAD130 million, and you are looking at mid-[30s] and perhaps more next year. So, the production rate could probably go up over the next few quarters? Is that the case?

Yes, it already has. We have this quarter I think we delivered 13 --?

13.

13 external deliveries, and I think if you look at Q2, we had five. Q1 we had three. It's not linear, and what you got to remember -- you can't directly correlate that with revenue because the -- what we measure there is when we say 13 deliveries, is 13 that have started training at the customer. But, it's not a direct correlation. Stephane could lead you more into why that is, but to your question really, no, production is going to continue to increase as we deliver all these products.

Our next question is coming from the line of Benoit Poirier with Desjardins Securities. Please proceed with your question.

Just in light of the uncertainties on the defense side, would you consider making some acquisitions perhaps in fiscal '13 just to compliment your organic growth? And if so, would you favor any of your three businesses in particular?

We are always looking at acquisitions that fit our strap plan, and so I'm not saying that we would prioritize any one sector except that if we were to do any sizable acquisitions, they would likely be in our core markets of Civil Military. So, we are always looking. We've got our ears open, and you've seen us do a few small ones. METI was a bit larger, probably the larger that we would do in New Core Markets. So, yes, we would look at it.

Operator, we will use this opportunity now to allow some time for members of the media to ask questions, and we will conclude the formal portion of the Q&A session with investors.

(Operator Instructions) Very good. At this time, Mr. Arnovitz, there are no questions from press or media, and we still have one question from the financial analysts.

Okay. We will take that one last question, and then we will conclude the call.

Thank you. Our last question coming from the line of Chris Murray with PI Financial. Please proceed with your question.

Thanks. Just a minor housekeeping -- the utilization rate for Training Services? It was 73% in the quarter? It wasn't that it grew 73% -- is that correct?

73% in the quarter. Yes, correct.

Okay. All right. Thank you very much.

Okay. Thank you.

Operator, I'd like to thank all participants on the call with us this afternoon and to remind everyone that an archive of the discussion can be found on CAE's website at CAE.com. And, of course, I am available after the call for members of the financial community who wish to follow up. Thank you very much, and good afternoon.

Ladies and gentlemen, that does conclude the conference call for today. We thank you for your participation, and ask that you please disconnect your line. Have a great day.