Yahoo Finance CAE Inc. (NYSE:CAE) Q2 2024 Earnings Call Transcript
CAE Inc. (NYSE:CAE) Q2 2024 Earnings Call Transcript November 14, 2023
Operator: Good day, ladies and gentlemen. Welcome to the CAE Second 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: Good afternoon, everyone, and thank you for joining us. Before we begin, I'd like to remind you that today's remarks, including management's outlook and answers to questions, contain forward-looking statements. These forward-looking statements represent our expectations as of today, November 14, 2023, and accordingly, are subject to change. Such statements are based on assumptions that may not materialize and are subject to risks and uncertainties. Actual results may differ materially, and listeners are cautioned not to place undue reliance on these forward-looking statements. 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 Plus and 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 open the call to questions from financial analysts. And at the end of that segment, we'll open the line to members of the media, should there be any questions. Let me now turn the call over to Marc.
Marc Parent : Thank you, Andrew, and good afternoon to everyone joining us on the call. We delivered a good performance overall in the second quarter with double-digit top and bottom line growth, driven mainly by continued strong momentum in Civil and higher contribution from Defense compared to the second quarter last year. We made excellent progress to secure CAE's future with nearly $1.2 billion in total adjusted order intake for a record $11.8 billion of adjusted backlog. We further bolstered our financial position on the path to meeting our short-term leverage target. In Civil, we had another quarter of excellent performance with demand for our training and flight operations solutions continued to be robust across all regions, and notably in Asia, which has lagged in the global recovery in air travel.
We booked $618 million of orders with customers worldwide for a 1.08 times book-to-sales ratio. We received orders for 15 full-flight simulators, including a multiyear purchase of eight new Boeing B737 MAX simulators for Ryanair and two Airbus A320 simulators to United Airlines. In commercial aviation training, we signed a multiyear training agreement with Delta Airlines, and in business aviation, we signed a multiyear agreement with Windrose Air Jetcharter. In flight operations, we signed long-term next-generation solutions agreements with Wizz Air and Air India. We delivered 11 full-flight simulators to customers during the quarter, and our average training center utilization was 71%, which is up nicely from 66% last year. The year-over-year increase points to the strength of the underlying commercial and business aviation training demand across all regions.
Anyone who's traveled by air this summer will know just how busy the airlines have been trying to meet passenger demand. The sequential decrease in training center utilization that we experienced during this summer is a direct reflection of seasonality. We expect -- we typically see as pilots are actively flying during that period. In Defense, performance was a bit lower than the first quarter but still higher than the second quarter last year. We booked orders for $527 million for a 1.1 times book-to-sales ratio, giving us a record $5.9 billion of adjusted Defense backlog. They include strategic opportunities, like the formalization of our contract with Bell Textron as part of Team Valor to provide simulation and training solutions for the all-important V280 tiltrotor, the platform for the Next Generation U.S. Army Future Long-Range Assault Aircraft program.
Other notable wins include the previously announced simulation-based training contract with U.S. Army's key next-generation airborne ISR system, which is called the High Accuracy Detection Exportation System, or HADES, which is based on Bombardier Global 6000, 6500 business jets. Defense also received an order to provide the U.S. Army with support services for the Advanced Helicopter Flight Training Support Services contract for aircrew and non-aircrew personnel. Additionally, Defense was awarded contracts for modification and maintenance of F-16 training devices for United States Air Force as well as for the upgrade of various training devices. With that, I'll now turn the call over to Sonya, who will provide additional details about our financial performance.
Sonya?
Sonya Branco: Thank you, Marc, and good afternoon, everyone. Consolidated revenue of $1.09 billion was 10% higher compared to the second quarter last year, and adjusted segment operating income was $138.5 million compared to $124.7 million in the second quarter last year. Our quarterly adjusted EPS was $0.27 compared to $0.19 in the second quarter last year. We incurred restructuring integration and acquisition costs of $37.9 million during the quarter relating to the AirCentre and L3H MT acquisition. Net cash from operating activities this quarter was $180.2 million compared to $138 million in the second quarter of fiscal 2023. Free cash flow was $147.5 million compared to $108.4 million in the second quarter last year. The increase was mainly due to a higher contribution from non-cash working capital.
We usually see a higher investment in noncash working capital accounts in the first half of the fiscal year. This year, I'm pleased that we've already begun to see a reversal in that in the second quarter, and we expect that positive trend to continue into the back half of the fiscal year. We continue to target 100% conversion of adjusted net income to free cash flow for the year. Capital expenditures totaled $61.9 million this quarter, with approximately 60% invested in growth to specifically add capacity to our civil global training network to deliver on the long-term training contracts in our backlog. Income tax recovery this quarter was $8.5 million for an effective tax rate of negative 16%. The adjusted effective income tax rate was nil, which includes the recognition of previously unrecognized deferred tax assets, which had an approximate $0.05 positive EPS impact this quarter.
Net finance expense this quarter ended at $48 million, which is down from $54.1 million in the preceding quarter and up from $41.3 million in the second quarter last year. Our net debt position at the end of the quarter was approximately $3.2 billion for net debt to adjusted EBITDA of 3.16 times at the end of the quarter. Following the end of the quarter, we announced a definitive agreement to sell Healthcare for an enterprise value of $311 million, a decision which better positions CAE to efficiently allocate capital and resources to secure growth opportunities in our large core simulation and training markets. We intend to apply a significant portion of the net proceeds to reduce debt. The transaction is expected to close before the end of the current fiscal year, subject to closing conditions, including customary regulatory approvals.
With leverage having decreased to a ratio of approximately 3 times, we will consider reinstating capital returns to shareholders following the closing of the Healthcare sales transaction. We are prioritizing a balanced approach to capital allocation, including funding accretive growth, continuing to strengthen our financial position, commensurate with our investment-grade profile, and returning capital to shareholders. Now turning to our segmented performance. In Civil, second quarter revenue was up 13% to $572.6 million compared to the second quarter last year. And adjusted segment operating income was up 9% to $114.3 million versus second quarter last year for a margin of 20%, both solid improvements over last year. And as Marc referenced, CAE's second quarter is normally seasonally softer with respect to training center utilization, which typically has some impact on business mix.
In Defense, second quarter performance was better than the same period last year, with revenue up 8% to $477.4 million and adjusted segment operating income up 16% to $21.3 million, giving us an adjustment -- adjusted segment operating income margin of 4.5%. The year-over-year growth came mainly from a higher level of activity on programs, partially offset by higher SG&A expenses from higher bid and proposal costs associated with the pursuit of larger pipeline of defense program opportunities. Defense performance was lower than the preceding quarter, as we managed through the ongoing retirement of legacy programs from backlog. We also had lower revenue than we expected from newer and more profitable programs due to recent funding and award delays.
And in Healthcare, second quarter revenue was $38.5 million, down from $43.6 million in Q2 last year. Adjusted segment operating income was $2.9 million in the quarter for an adjusted segment operating income margin of 7.5%. This is up nicely from Q2 of last year. With that, I'll ask Marc to discuss the way forward.
Marc Parent: Thanks, Sonya. Our outlook for CAE continues to be positive for the fiscal year and beyond. Our strong momentum is translating to robust order flow and a record backlog, which portend an excellent future for CAE. In our core civil and defense markets, our customers increasingly require innovative training and operational support solutions to perform at their best in mission-critical environments. And as we look ahead, we remain highly encouraged by the favorable secular trends that we see and in the growth that we anticipate by leveraging our global market position. As well, our technological expertise and the strength of our one CAE culture portends for optimism. In Civil, we expect to continue growing at above market rate, driven by the growth in recovery in air travel, increased penetration of the existing addressable market for training and flight services solution, and a sustained high level of demand for pilots and pilot training across all segments of aviation.
For the current fiscal year, we now expect Civil to deliver growth in the mid- to high-teens percentage range of adjusted segment operating income. And given the profile of our planned simulator deliveries and the normal seasonality of training demand, performance will be mostly weighted to the fourth quarter. The higher expected annual growth is based on our strong performance year-to-date and the visibility that we have in a highly regulated aviation training market. In addition to continuing to grow our share of the aviation training market and expanding our position in digital flight services, we expect to maintain our leading share of full-flight simulator sales and to deliver approximately 50 full-flight simulators for the year. Approximately half of those deliveries are slated for the fourth quarter.
Turning to Defense. We expect to continue making good progress transforming our business by replenishing our backlog with more profitable programs and by retiring low-margin legacy contracts, which we expect to culminate in a substantially bigger and more profitable business. We strengthened our future position in recent quarters with strategic and generational wins, including next-gen platforms, giving us a record $5.9 billion adjusted backlog. Together with a record $9.5 billion pipeline of bids and proposals outstanding, we continue to see positive signs of the transformation underway. And as we look at the remainder of fiscal 2024, the positive inflection we expected this year in Defense has been delayed because of impact associated with the retirement of our lower-margin legacy contracts, specifically those awarded prior to COVID and current new program delays.
And while the inflationary impacts on these contracts are known and finite in nature, they continue to be the most significant factor contributing to the current low margin performance of the business and does not reflect its underlying potential. The essential trendlines of replenishing our backlog with larger and more profitable programs, while simultaneously retiring legacy contracts, remain positive. However, the prevailing U.S. government budget appropriation uncertainty is slowing to ramp up of the new and higher-margin defense programs that we've been awarded. This is also impacting the conversion of our bid pipeline to orders that we expected to generate higher margin revenue for this fiscal year. As a result, we now expect second half Defense adjusted segment operating income margins to remain in the current single-digit percentage range.
We expect to see Defense segment performance improvements materialize next fiscal year, but this will ultimately depend on the duration and magnitude of delays to new programs in the current environment. We're firmly focused on retiring legacy contracts as soon as possible and mitigating the margin pressures associated with them. We remain pleased with the accretive margin profile on our newly awarded contracts, which should be the best indication of where the future performance of Defense is headed. We maintain our conviction that the ongoing retirement of legacy programs and a new order backlog growth will result in a low-double-digit percentage margin business at a steady state. Lastly, on Healthcare. I want to thank Jeff Evans and the entire Healthcare team for their dedication and excellent performance.
We're proud of this significant contribution to patient safety that CAE Healthcare has made, and I believe that Madison Industries is the right home to take the business to the next level. Like CAE, Madison's mission is rooted in making the world safer, and I believe it will be ideally positioned to support the future growth of the business, which will continue to focus on evolving simulation to drive patient safety and quality outcomes. For CAE overall, we continue to be highly encouraged by the secular tailwinds at all segments and the growth we expect by harnessing our global market and technology leadership and the power of One CAE. With that, I thank you for your attention, and we're now ready to answer your questions. Operator, we'll now take questions from financial analysts.
Operator: [Operator Instructions]. Our first question comes from Fadi Chamoun with BMO. Please proceed.
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