Good day, ladies and gentlemen, and welcome to the CAE First Quarter Conference Call. Please be advised that this call is being recorded today.
I would now like to turn
the meeting over to Mr. Andrew Arnovitz. Mr. Arnovitz, please go ahead.
Good afternoon, everyone, and thank you for joining us today. Before we begin, I'd like to remind you that today's remarks, including management's outlook for fiscal year 2020 and answers to questions, contain forward looking statements. These forward looking statements represent our expectations as of today, August 14, 2019, 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 contained in CAE's annual MD and A available on our corporate website and in our filings with the Canadian Securities Administrators on SEDAR and on the U. S. Securities and Exchange Commission, EDGAR site. On the call with me this afternoon are Marc Parlin, CEE's President and Chief Executive Officer and Sonia Branko, our Chief Financial Officer. After remarks from Marc and Sonia, we'll take questions from financial analysts and institutional investors.
Following the conclusion of that Q and A period, we'll open the call to questions from members of the media. Let me now turn the call over to Mark.
Thank you, Andrew, and good afternoon to everyone joining us on the call. I'll first discuss some highlights of the quarter and then Sonia will review the detailed financials. I'll come back at the end to talk about our outlook. CAE had a good start to the fiscal year with double digit revenue and operating income growth and $940,000,000 of orders for a 1.14 book to sales. CAE's total backlog at the end of the quarter was $9,400,000,000 Performance was led by Civil, which delivered strong operating income growth and continued to add significantly to backlog.
I'm especially pleased with our market momentum, winning the confidence of our airline and business jet customers with our innovative training solutions. Defense is more variable on a quarterly basis and 1st quarter results reflect this tendency as well as an income growth profile that's more heavily weighted to the second half of the fiscal year. And in healthcare, the revenue momentum we saw at the end of last year continued into the Q1. Looking more closely at Civil, we booked $694,000,000 of orders in Q1, including multi year pilot training agreements with airlines including LATAM, SAS and Aerie Europa. We also signed new 5 year pilot training contract with Philippines AirAsia, which incorporates our highly innovative and data driven CAE RISE training system.
Civil sold 9 full flight simulators during the quarter, including 3 to Southwest Airlines for the Boeing 737 MAX, one to Korean Air for the Airbus 330 and one to Hawaiian Airlines for the Boeing 787. Overall, training center utilization remained strong at 76% on our network of nearly 300 full flight simulators deployed. In defense, we booked orders for $220,000,000 including contracts with Lockheed Martin for C-130J simulators for the U. S. Air Force and the U.
S. Marine Corps. Other notable orders include a contract with L3 Mass to continue providing in service support for the Royal Canadian Air Force CF-eighteen fleet and contracts upgrade to German Eurofighter and Tornado aircraft simulators. New awards also included contracts for naval training solutions for the Canadian Surface Combatant Program and upgrades to the Swedish Navy's naval warfare training system. And in healthcare, we continue to pursue larger segments of the healthcare simulation market with our expanded sales force.
We announced a new CAE Center of Excellence for simulation based training at ESPA Montreal, which is an innovative healthcare education and industry partnership designed to improve patient care. We also developed and delivered a simulation solution to medical device company Bayless Medical to support one of its cardiovascular systems for physicians. As well, we collaborated with the Canadian Association of Schools of Nursing to develop courseware for student nurses practicing with our CA Juno mannequin. With that, I'll now turn the call over to Sonia, who will provide you a detailed look at our financial performance. I'll return at the end of the call to comment on our outlook.
Sonia?
Thank you, Mark, and good afternoon, everyone. Consolidated revenue for the Q1 was $825,600,000 up 14% compared to $722,000,000 in the Q1 of last year. And segment operating income before specific items was $113,300,000 up 15% from $98,500,000 last year. Quarterly net income before specific items was $63,200,000 or $0.24 per share, which is 8% lower than the $0.26 we reported in the first quarter last year. Net finance expense for the Q1 was $34,900,000 up from $16,000,000 in the Q1 of fiscal 2019.
We had higher interest resulting from the long term debt we issued at the end of last year to fund the acquisition of the Bombardier Bank Business as well as we had higher interest on lease liabilities because of the adoption of IFRS 16. Income taxes this quarter were $13,000,000 representing an effective tax rate of 17%, which is up from 13% for the Q1 last year. The higher tax rate was mainly due to the impact of tax audits in Canada last year, partially offset by a change in the mix of income from various jurisdictions. Cash provided by operating activities this quarter was up 18 percent to $137,800,000 compared to 117 point $2,000,000 in the Q1 of fiscal 2019. Free cash flow was negative $102,000,000 in the quarter compared to negative $86,000,000 last year.
We had a higher investments related to work in progress inventory for simulator products to be delivered over the balance of the year, and we had lower payloads. We usually see a higher investment in non cash working capital accounts in the first half of the year. And as in previous years, we expect the portion of the non cash working capital investment to reverse in the second half. Uses of cash in Q1 included funding capital expenditures for $89,000,000 mainly for growth and specifically to add capacity to our global training network to deliver on the long term exclusive training contracts in our backlog. We continue to expect total capital expenditures for the year to be modestly higher than the prior by about 10% to 15%.
Other uses of cash include a distribution of $25,500,000 in cash dividends and we used another $2,000,000 to repurchase stock at a weighted average price of 34.41 per common share under the NCIB program. Our financial position continued to be solid with a net debt of $2,300,000,000 at the end of the quarter for a net debt to total capital ratio of 49.4%. This reflects the issuance of the unsecured senior notes for the Bombardier business acquisition and the higher usage of cash to fund working capital in the first half of the year. Since we adopted IFRS 16 effective April 1, 2019, net debt now also includes obligations under lease contracts, which were previously accounted for as operating leases and therefore not included in debt. Excluding this impact, the net debt to capital ratio would have been 46.3% this quarter.
Return on capital employed before specific items and excluding the impact of IFRS 16 was 12% this quarter, a bit lower than the 12.6% last year as we ramp up the large Bombardier Bass business acquisition, we continue to target 13% return on capital employed by fiscal 2022. Now looking at our segment performance. In Civil, 1st quarter revenue was up 11% year over year to $477,600,000 and operating income before specific items was up 29% to $101,000,000 for a margin of 21.1%. From a mix standpoint, simulator product deliveries were lower compared to the Q1 last year as we expected, while training services growth was especially strong with our expanded capacity. On the order front, Civil book to sales ratio for the quarter was 1.4x and for the trailing 12 months was 1.54x.
In defense, 1st quarter revenue of $320,500,000 was up 19% over Q1 of last year, while operating income was down 30% to $15,100,000 for an operating margin of 4.7%. In defense, product margins are typically higher than services and the strong revenue growth in the Q1 was skewed to nearly 2 thirds services. And I'd add mainly on new awarded service programs are in the early stages of profitability ramp up. The lower segment operating income in the Q1 reflects this mix as well as the second half weighted timing of product program milestones we plan to achieve on the higher margin product contract already in our backlog. The mix and balance the quarter also reflects some variability in the timing of new product orders that we expect to conclude during the course of the year.
The defense book to sales ratio was 0.68x for the quarter and 0.83 times for the last 12 months. Lastly, in healthcare, we continue to ramp up scale with the Q1 revenue of CAD 27,500,000 which is 21% higher than the $22,800,000 in Q1 of last year. Healthcare segment operating loss was $2,800,000 in the quarter compared to a loss of $1,300,000 in Q1 of last year, mainly because of a higher investment in SG and A to support a larger business. With that, I will ask Mark to discuss the way forward.
Thanks, Sonja. We continue to see good momentum with our training strategy, which is supported by secular growth trends across all of our markets and underpinned CE's investment thesis. In civil, market fundamentals remain supportive with long term passenger traffic growth and expanding global in service fleet of aircraft. Civil Aviation is a highly regulated industry and the aviation safety imperative underscores the criticality of pilot train. It also brings to bear the essential role that CAE plays in helping to maintain the safety of the global air transportation system.
We're a pure play aviation training company that's well defined as an innovation leader. Our airline customers face ever more complex challenges that require new approaches and comprehensive solutions. We have the largest and broadest global training network, coupled with market leading simulation products and support. And as we look ahead, we expect to see more airline outsourcing opportunities materialize from a large pipeline of long term training partnerships. With worldwide demand for approximately 300,000 new first officers forecast for the next decade, CA is increasingly the partner of choice offering the industry's most comprehensive cadet to captain training solutions, And we do this on a global scale.
We're actively taking a leadership role to ensure that our industry has the qualified pilot it requires. With women accounting for only 5% of all commercial pilots, we're determined to draw in the full available talent pool. Among several other initiatives underway, the CAE Women in Flight Scholarship Program encourages women to become professional pilots. We recently announced the launch of a cadet pilot training program, where CAE will train more than 700 new professional pilots over the next 10 years for Southwest Airlines as part of their Destination 225 program. Our collaboration with Southwest is yet another great example of our commitment to source, train and maintain pilots to support the industry's demand over the long term.
For Shible overall, we continue to expect operating income to grow in the upper 20% range on continued strong demand for our training solutions, including maintaining a leading share of full flight simulator sales and the integration of the 1st full year of the Bombardier Business Aircraft Business. We expect to complete the integration of this business over the coming quarters, and we continue to expand our market addressability with the operators the nearly 5,000 Bombardier business jets worldwide. In defense, we're continuing to pursue a large market with over $4,200,000,000 of defense proposals in the hands of customers' pending decisions. Like Civil Aviation, defense forces around the world also face the challenge of training and maintaining sufficient numbers of critical personnel, specifically pilots. I remain encouraged by the large pipeline of opportunities to support our defense customers, and we expect to continue winning our fair share by building on our successes as a training systems integrator.
As in previous years, the full year will be more representative of the Defense segment performance. We continue to expect Defense to generate mid to high single digit percentage operating income growth this year as we deliver from backlogs and continue to win orders. And finally, in Healthcare, I'm pleased that our new products and strengthened front end organization are bearing fruit and I'm confident that this will continue. For the year, we expect double digit percentage growth and we remain confident of the long term prospects for healthcare to become a more material part of CAE. In summary, we remain on track to deliver on CAE's growth outlook for the year.
We have the benefit of an increasingly recurring base of business in markets with significant headroom for CAE to expand its share. And we look forward to superior top and bottom line growth in the years ahead. Before I conclude, I want to thank Kate Stevenson, who retired from SHE's Board of Directors today. Kate is stepping down and having reached our 12 year term limit. During her tenure as Director, CAE has transformed itself to becomes the world's largest civil aviation training company.
I also want to welcome Mary Anne Harrison, who was appointed today as a new CA Director. Maryann is President and CEO of the John Hancock Life Insurance Company and is chartered accountant and fellow of the profession. She brings a wealth of financial and strategic acumen to the role and we look forward to benefiting from her insight and good governance. With that, I thank you for your attention and we're now ready to answer your questions.
Thank you. Operator, we're now ready to take questions from financial analysts and members of the financial community.
Thank you very much. And our first question is
was wondering if we were to back out the Bombardier Training acquisition, what of organic revenue growth both on the operating income line and the revenue line look like? Or maybe conversely, what did that contribute to both those line items, both civil revenue and civil operating income,
if you could share that?
Well, I think if you're trying to maybe back out, which I assume is to back out the benefits of the Bombardier Aircraft Training business, I'll start by saying that, that business is going very well and the integration, if anything, is going ahead of plan. I was quite happy with that. And I think when you look at the numbers, I think what we could tell you is that business is performing very well organically. Training business itself is going as we expected by double digits top and bottom line. When you look at the results, I would you'd actually bear in mind that in the quarter, we delivered a lot more less simulators in the quarter, mainly just because of timing of deliveries of customers.
We delivered 5 in the quarter relative to 12 last year. And as you know, with the way we account for those, we only account for them at delivery. So I think, go back to question organically, the business is performing very well.
Okay. That's helpful. Actually, do you have a sense is the idea to basically deliver a similar number of simulators for the full year 2020 as fiscal 2019?
Yes.
Yes. Okay. And then a bit of a nitpicky question, but utilization was down about 4 points year over year. Just wondering what drove that? Was it a mix issue because you had folded in the Bombardier assets?
Or is there something else at play there to drive that 4 point decline?
I think that the main issue that drives that is, first of all, I'll say the utilization is quite high. And what you're not seeing there to your question is because we deployed from about 260 to 294 in the past year with several of those deployed in the last two quarters. So what you're just basically seeing is just a ramp up of SIMs that have just been put in that are operating a little bit. The network itself is operating very, very high
like this.
Okay. That's great color. And maybe just more of a clarification point. I did not see it in your MD and A, so I apologize if it's there. Did you provide or did the impact of IFRS 16 have any material impact on the reported EBIT relative to the year over year comp?
Was it I don't think that's on any MD and A?
So Kevin, I don't think on the whole, it did not have a material impact on the SOI or EPS. It's a little bit of a headwind. But for the year, what we had said last quarter is that we'd have a bit of a headwind of that $0.01 EPS for the year. Now in the comparisons year to year, I think on the balance sheet is where you see the most impact with the increase on the right of use assets and the debt, but we've kind of we've given you the metrics adjusted for the IFRS 16 elements on the balance sheet.
Perfect. That's it for me. Thank you for taking my questions.
Thank you.
Thank you.
Our next question is from Cameron Doerksen with National Bank. Please go ahead.
Yes, thanks. Good afternoon. Just really two quick ones for me. Hani, you've mentioned or talked about the working capital investment in Q1. It does seem as though it was sort of larger than what we would normally see in a Q1, significant working capital investment.
Was there anything unusual in Q1 that would have driven that?
No, nothing overly unusual. I mean, we always usually see a negative free cash flow investment in working cap in Q1, in fact, for H1. What I called out in the remarks was a higher level of work in progress simulator. So these are simulators that are going through production tag to clients. And given that we had lower deliveries this quarter, hence they didn't turn into revenue and of course AR and cash flow.
We expect those to be delivered over the next few quarters. So really this is a question of timing.
Okay. No, that's great. And just sort of secondly, really, as a modeling question, just maybe talk about the depreciation run rate. With the number that we saw in Q1, is that actually a good run rate to use kind of on a quarterly basis for the full year?
I think, yes, it's quite indicative. Ultimately, you have two factors in there. You have the impact of IFRS 16 and the added depreciation because the assets are now on balance sheet. And of course, the impact of the intangibles from the acquisitions from last year, namely the Bombardier Business Jet Training acquisition. I think you can use that as a good run rate.
Okay, perfect. That's all for me. Thanks.
Thanks. And our next question is from Konark Gupta with Scotiabank. Please go ahead.
Good afternoon and thanks for taking my questions. So on the Civil side, just wanted to touch base on the margin side. Can you hear me okay, Andrew?
Yes, we hear you. Gladys, go ahead.
Yes. So on the civil side, the margins are pretty strong. And I guess Bombardier acquisition helped there. So just wanted to understand, this is 21% in Q1 and it's already pretty strong and seasonally you always have second half much stronger. So what are your expectations around the civil segment margin for the full year?
Can we see something like 22%, 23%, is that a possibility over time?
Well, I think that it's like Konar. I think what you're seeing again in the Q1 in terms of the margin is the proportion that's coming from training, which is higher margin than products. You'll remember when answering Kevin's question that we only delivered 5 simulators in the quarter versus 12 last year. So although it's good margins and products not as good as service as training. So I think you're seeing a bit of that.
And I think for the full year, I think we continue to just guide to absolute operating income growth rather than margins. Notwithstanding, I think margins will be good.
The only thing I would add to that is, as we said, when we introduced the Bombardier business, Jet Training business, is that that would have the effect of about 100 to 150 basis points of margin
accretion. Okay, that's great. And just want to clarify, was there any impact of Boeing 737 MAX in the Civil segment? Because obviously, they're still grounded and airlines are not taking deliveries right now. So is there any reduction in training in MAX and if there's an offset in training other aircraft types?
Not really. It's not much of an impact for us, positive or negative. I think in the quarter of materiality, I think we continue to deliver Max Sims. I think it will deliver this quarter 8 or what how much we think we'll deliver? Yes, we'll expect to deliver probably 8737s in the next quarter.
So we've already delivered a bunch. So that's not slowing down. You saw we sold 4 MAX simulators in Q1, which is about what you would expect when you're considering the number of aircraft that have been sold in odd order. So bottom line is really materially affecting our results one way or another right now.
Okay. That's great color. And then lastly on defense, so I think there was a note in the MD and A that you had some dilutive impact of fair value revaluation of share based payments. So can you clarify what is that? And is that nonrecurring in nature?
Or can we expect something in the next quarter as well?
Well, it's not indicative of a continued run rate. There was a bit of a timing spike in the quarter because of the appreciation or the steep appreciation in the share in the long term incentive plans with get mark to market with the share price. So there was a bit of a steeper timing on those costs for the quarter.
Okay, that's great. And the European services programs continue to show weakness, I think, in the different side. Any thoughts there, Mark, why Europe is weak here? Is it particular programs you see or is it general market weakness?
Where do you see your PMD and A? Oh, any MD and A. Okay. Well, I think maybe we're talking about timing on orders. I think the whole situation that you see with regards and why we back up, what we said, we said that the year would be back end loaded and we're seeing it.
When you look at what we've done this quarter on defense, you have about 2 thirds of our revenue in the quarter coming in from services, which is lower margins and the programs going through are still in the early stages of profitability ramp up. And we just haven't been able to make the progress in the quarter on on certain programs, either because we weren't able to achieve the milestones that we needed to be able to book a good portion of the revenue for a variety of reasons. Give you one, the aircraft program is it's not a reach their milestones, so we can't reach ours or we don't have the information we need, whatever. And a lot of times you don't all you need to do is miss the end of the quarter, that's going to move to the next quarter. And some orders that we expected to get were delayed and we're getting them later.
So I think in terms of Europe itself, it's not a European phenomenon, it's timing. Okay.
Thanks for the color. Thank you.
The only other thing I'll tell you is that in terms of backing up our optimism on why it's back end loaded is that, of course, we know what the backlog is and we have a pretty good idea of when we'll be able to achieve the milestones at which we book revenue and earnings. And also, we need to we always need to win continue to win orders in the year, particularly on products because a part of a portion will materialize in the year. We're pretty confident of that about that because the great majority over 90% of what we need to generate from orders that we don't have in our hands right now, we've already been selected. So it's not a question of whether we'll win or not. It's just the uncertainty of when exactly is the training is the contract going to be signed.
So we don't have to control all of that. But we've made some pretty fair assumptions that we feel confident about that, which gives us those two factors give us the confidence, having done an exhaustive detailed analysis, of course, of why we feel comfortable with the outlook that we maintain. And
our next question is from Benoit Poirier with Desjardins Capital Markets. Please go ahead.
Yes. Good afternoon. Just to come back on the defense margins, you seem quite confident that the revenue mix will be more favorable going through the second half. Could you maybe provide some color with respect to how much of the products revenues are already booked in the backlog right now or whether you need still to gain a lot of business to achieve this milestone?
I don't I'll turn over to
I don't think we can give the amount of that in absolute terms, but the confidence comes from what I was just saying there to Konaar is that the amount of the uncertainty we would have with regard to the products order that we need to get this year is with the confidence we get it because we're selected, we're already selected on over 90% of those orders. So we're going to get that business. So the only uncertainty that remains is when you're actually going to sign the contract. So I mean, we're not totally obviously in control of that, right? The customers that's in the hands of the customer as well as ourselves.
But the assumptions we've made are based on very good intel of what we know, because these things are near term. The other thing as well is that doesn't include the fact that the orders that we haven't been selected on, but we have a very strong backlog or pipeline, I should say. I mean, we've got $4,200,000,000 of proposals that are out there that are awaiting decisions. So you take so some orders that potentially that will win, that will just add to the confidence that we have of leading analysts that we have. So those are the reasons we're confident.
And I'll tell you, Benoit, we saw this last year and we saw this year before as well. And I think that we're kind of at the same place except that I would say that we're we have to if I just look compared to last year, we're picking up this earlier in the year. So I think it gives us even more time to materialize the outlook that we have.
Yes. If I just
Can you just add to your question on how we make it up, there's order intake, but we have a very detailed plan to make up the advancement on the product programs during the course of the year but more weight on the second half. But and given the higher margins of these programs, the contribution is disproportionate and we'll move on the operating income and the margin.
Okay. That's great color. And related to the Boeing 737 MAX, there's a lot of discussion on whether there will be a requirement for additional training. So I was wondering if you could maybe provide some color about what would you expect in the next 12 to 24 months and how much 737 MAX insulators do you have in your backlog right now?
Well, I think that look, we'll have to wait to see what the regulators say when airplanes start coming back when they're clear to fly in the various jurisdictions. We sold great majority of the simulators that are out there. We certainly expect to continue to be successful like we have on the rest of our platforms. So I think it's a win to see. Clearly, there's going to be a lot of training to be done when the simulators when the aircraft are cleared.
So I would see pent up demand there when airlines start to fly that I would expect. So but I had no color more than anybody else does on what the authorities will ultimately decide on what training is done on what simulator.
Okay. That's perfect. And on the civil aviation side, Marc, you mentioned that you expect more outsourcing opportunities with the airlines. So are there any particular region where you expect CAE to be more active? And in terms of simulators order, do you still feel confident that you can achieve 60 plus this year in terms of booking?
Benoit, it's Andrew. Actually what we've said as we've said in previous years is that we'll maintain a leading share. I think what I would look to is aircraft deliveries, which are still at a relatively high rate, ex the temporary setback in MAX deliveries. And that stimulates certain level sustained high level of demand for full flight simulator. So what that will precisely be, I guess, will become clearer as the year progresses, but we see a pretty good run rate.
Okay. That's great. And on DL Care, we saw a nice pickup in revenues. Margin negative, but I assume it's typical seasonality. So do you still feel confident that the double digit growth can also be achieved on the operating income side?
Yes, absolutely. Okay. Quite encouraged with the progress that our new leader Rekha Ranganathan is making with her team and the experience that she brings from our senior leadership or senior levels in Philips and other companies. So definitely, we're seeing the momentum there, and I would expect that to continue.
Okay. Thank you very much for the time.
And ladies and gentlemen, we welcome your questions. Please press the one followed by
Operator, if there are no more
There are no other questions on the phone lines from participants, sir.
Okay, then. Well, I'll thank all participants for joining us this afternoon and remind you that
Ladies and gentlemen, that concludes the call for today. We thank you for your participation. Everyone have a great rest of your day. You may disconnect your line.