CAE Inc. (CAE) 2016-05-19 Earnings Call Transcript

Operator:

I think I'll start. I think we're seeing the same kind of growth profile that we would see this year. I mean this continues to be to be the good rate of utilization in our training centers that aren't drive the majority of growth. Of course, the 53 simulators that we sold this year will also help as they drive through our production and we get them out. In terms of revenue, I think we focus more of our guidance on the operating income, but clearly, I think we will see probably in my mind revenue growth in line with - in low double digits as we see in this year. Q - Fadi Chamoun:

Is that right Stéphane or he puts right? A - Stéphane Lefebvre:

Well, when you look at it, in the end, there is a range and we talk about low double digit. I think [indiscernible] we've got the outlook and that's the one thing I don't want to get off track of what we've got in our press release and what is our output we're sticking with and that's the low double-digit percentage operating income growth. Q - Fadi Chamoun:

So, we've given some indication of the amount of CapEx that we think we'll need to invest in successful years of a team for that program about $100 million. And the plan really for us is to execute the entire building of the infrastructure including, we need some aircraft to deliver sort or so, the plan is to get it all delivered in fiscal 2017 and be ready to start training in fiscal 2018. And I think as we said at the Investor Day and I think I've said it again in the remarks, the center will open up in fiscal 2018 and it will be start to be accretive as we start operating the business in 2018. As far as the working cap is concerned, I think you can expect some investment in working cap, but not a huge lot. I think it's par not different from any other service contracts that we have where we - you can plan on about a month or two of working cap investment but that's pretty much it.

Well we just closed a very recently but a bit early to talk about that. I mean I haven't seen change so far you wouldn't expect it to see so far on this and we'll keep - we'll let you know I think clearly I think it's going to have some effect for sure and we'll see what happens this sort of number of competitors there but clearly have one less. So I think that we should help clearly. In terms of numbers of simulators for the year, I think look I'm going to start at the same point, I started this year and to say that we started the year around 40% and that I think I would stick with that for the moment. And really because it's based on the our basis for providing that outlook is really delivery of aircraft part of the OEMs and sometimes we get multiyear sales like we've had a couple of this year, if you think of Southwest Airlines about five at once and then we have another airline by five at once. So and that's not going to happen every year. So I would say we'll start with 40 and we'll update as we go. Q - Cameron Doerksen:

Look, I think we're going to update you Cameron and the rest of the finance community when we report our Q1 report. We just closed the deal at the beginning. I think that you - I mean like in any other acquisition, I think you would expect some restructuring cost, but all-in, you've seen the price that we paid for it. It's - I think we consider this as a small bolt-on acquisition. We're pleased with the deal that we've made and we're convinced that the enterprise value will get to what we need out of it. Q - Cameron Doerksen:

Very small season, it's just started to kick in. It's just starting to, let's say globally, should see the bulk of that starting to kick in as we get into the second half of this year. Q - Steve Arthur:

Higher. No, I'm not trying to be - no, I'm not tried to be glib, but clearly I mean look I'm not getting a target on that. But suffice to say we've given for the year in terms of low double digit percentage operating income growth for the year. But clearly, we've demonstrated that, we're able to generate 19% that was over the question we get that, we get the 19%, where we've demonstrated that this quarter of 76% utilization, would you clearly say we can do that, so I think that's north of 20% is a new, I see that for sure. Of course, you have to be in a quarter high utilization. But look I think the demand is strong and as you said I think at the beginning of your question clearly I think this - the results in Civil clearly demonstrate where we've been saying for a while about deliver effect of increased utilization - our training centers and we would expect that to continue and especially as things get wetter i.e., we do more of the actual training, which of course is our vision, because you're actually doing more - more work on the existing - with the existing simulator. So, it's not just a question of the utilization itself, because if you get wetter, they're actually doing a courses, so you're adding value with the same asset.

No, for sure yes.

Thank you. Operator:

Thank you Benoit. Q - Benoit Poirier:

Well, I can't get you a precise figure Benoit on these top line and bottom line of the contract, but the plan for us is to get everything ready for training at the end of fiscal 2017, and ready to start operating the business in fiscal - the beginning of fiscal year 2018.

Okay, okay, perfect. And the last question for me, just in terms of tax rate, what should we be using going forward?

I think I hasn't been using the 22%, 23% guidance for a little while. We finish the quarter at 24%. We've - I looked at the past few quarters. Last year, we had a 22% normalized tax rate. It looks like we're - we keep going being in that range. So I think we're there at the same range that I have given in the past, 22%, 23% tax rate.

Good morning.

Hi. Q - Ben Cherniavsky:

Page 11.

The backlog itself if you look at each segments, you will see the FX adjustment in our backlog and we report that every quarter as an adjustment to the total backlog, so you can...

I'm sorry, can you may be able to talk in a different way, what - what is that causing you to revalue the backlog if it's not FX, that seems to be recorded separately?

Yes, we did and I think we've put in the MD&A as well but or I may have mentioned in my remarks. But we've invested especially in Q4 we had more selling and marketing cost. I know that we through a major selling event a large conference over a number of days that was of high value for the business but of course it was quite expensive and when you look at a business of the size of the healthcare, these things tend to have a bigger impact on the margin percentage so that's what's happened. We are looking at is really continued growth in the business so you see the kind of top line growth of the business is getting and of course the income will grow with it. Operator:

So I think we should - as we've said in our outlook that we expect to continue modest growth in Defense and I think that when we look at Stephane if you can help me out, but I'm pretty confident at this that when you look at the basket of orders that we've won in the backlog that we have the margins we're seeing there are no different, as again as a range of what we've been seeing in the past, or a margin - our margin kind of outlook would be the same. So that should translate if we - revenue growth and accompanied by earnings growth?

Yes. Margin profile of the backlog isn't significantly different from what we've had in the past and we've generated about 12%, and so that's kind of where we - what you can expect going forward? Q - Turan Quettawala:

There will be more to come, Turan, but we're within what we've said. I think about a year ago, in Q1 of last year, when we gave an indication of how much we think we would spend in restructuring cost and when the restructuring would finish, and when of course the benefits would start to kicking in. And so, we're right in line. There's probably something around $5 million after tax in our program to go in the first half of fiscal 2017. And as we said, we'll start seeing some benefit. We quantified at $15 million to $20 million on an annualized basis, and we'll start seeing that towards the second half of fiscal 2017. Q - Turan Quettawala:

Well, I think a lot it has to do with our large increase in utilization of our training center network that has a lot. So basically more customers training in our existing network or training centers and what - when that happens not only you would get lot more revenue but because you are - a lot of your costs already covered a disproportionate amount of that revenue drops to the bottom line and as it doesn't explain all of it but it's a - it's a good part of it and a lot of that growth has become - as it comes out of the fact that there is a big demand for pilots, new pilots and pilot training and that's what's driving things. And I think those are the big reasons that we've seen in it in terms of order intake we've seen in both Civil and military the markets themselves are growing. In the Defence for example, we see government's looking to outsource, more of trainers they do to private enterprises and we're seeing them use more simulation as a way to rehearse not only pilot training but the way they rehearse their mission and finally in healthcare, we're subsequently present over 20% over 20% revenue growth is people are being very receptive to the new products that and services that we provide and as seen that as a very good way to train people to make sure that healthcare practitioners are well prepared to be able to conduct the jobs that they have. And if they - so sorry, it's going to have a disproportionate amount of benefit of patients safety, by borrowing the best practices that come from the aviation world, which of course we're experts at.

Well, I think it would be usual risk that we cover in our financial disclosures, mainly at things that we don't control usually. Things that you can never predict, global what - think about stuff like for example a Pandemic that will hurt the passenger travel as an example, that's kind of things obviously you can't predict that. So I think it mainly associated we think with no control, that would be much biggest risk, but of course rest are covered. Of course, if you read our financial disclosures, you'll see all the risks that we've identified, but I think for the purposes of this call, I think it'd be lengthy to go through all of that.

You're welcome. Thanks Ross. Operator:

Andrew Arnovitz:

Okay. Thank you. Operator:

Okay. So in stronger quarters with more wet training and utilization approaching 80s over time something with the - starting with the two, isn't unreasonable thing to look for?

Okay, thanks. Over to queue.

Perfect. Thanks. Operator:

I think you've got it Ben, the beginning of the MD&A. Let me just make sure I get the figure right here, the translation of the revenue is $126 million and net impact, the impact on net income is $11 million that's from the translation of all of our current operations into Canadian dollars. I think you got that at the beginning to front end of the MD&A [indiscernible].

Okay. I apologize for that.

Okay. I will take that up. And then some of the revaluation of certain contracts in the backlog in that - in some of the changes there, could you just elaborate on that a little bit?

I mean most of the time it is FX. You will have in certain cases, it's been the case in the trends when we acquired, they are the bombardier military aviation training facility so the NFTC training outfit in the mostly on Cold Lake. There is a backlog that comes with it and so we don't consider - we don't treat this as an [indiscernible] it takes to revolve the business. So you would see, you'd see a positive adjustment on our - in our backlog in Defense when we do an acquisition. But I mean most of the time it's either acquisition, FX and in rare cases where we have had a cancellation of contract and we take it out.

Okay. And then on the healthcare side, the margin compression from year-over-year to stay in the MD&A, it was a function of mostly a higher SG&A what exactly where you - what exactly accounted for that because you did get revenue increase as well.

Operator, I think, we'll use the time remaining to extend the Q&A session to members of the media. I want to thank the members of the investment community for their questions. We'll now open the line please for members of media. Operator:

Yes, I'm wondering if you could give a little bit more detail as to there is a lot of different parts but what is the core reason you think for the record results in 2016?

Where in the world is this utilization growth coming from mainly?

Really across the world really. I mean lot of activity in Europe, lot of activity in North America and quite still long - strong demands in Asia, so I think I've covered the world here. I think well, actually this South America has been softer because of all the issues, specifically in Brazil as you would imagine, but the rest of the world is pretty strong actually.

And finally, what are the risks that you see for not meeting your growth target for 2017?

Thanks so much.