Before we begin, I'd like to remind you that today's comments, including management's outlook and answers to questions, contain forward looking statements. These forward looking statements represent the company's expectations as of today, March 23, 2020, 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 and A available on its corporate website and in filings with the Canadian Securities Administrators on SEDAR at www.sedar.com and the U.
S. Securities and Exchange Commission on EDGAR at www.sec.gov. And now I will turn the call over to Steve Arthur.
Great. Thank you, Chris, and good morning, everyone. It's Steve Arthur. I'm an equity analyst here with RBC. Very pleased this morning to be joined by the leadership team of CAE.
Extremely challenging and busy times and we very much appreciate your time to update investors on the situation and how it's being navigated at CAE. We're joined today by Mark Perron, CEO Sonia Branko, Chief Financial Officer and Andrew Arnovitz, VP of Strategy and Investor Relations. We've got about half an hour and I will focus the questions on 3 areas, current operations of the business, balance sheet resilience and then the long term resilience of CA's business model. Now let's begin. I think I'll turn the call over to Mark for a brief opening comment.
Thanks, Steve. First, let me state the obvious. This is a crisis of unprecedented speed and magnitude has caused a pretty dramatic disruption to the global air transportation system. Obviously, the downturn is led by a biological event and while obviously very grave, we definitely believe it will be temporary. For the moment, the question on every month's minds and ours is how long will it last and how deep will it be?
And no matter what the precise answers to those questions are, she has been designed for durability and we're taking the appropriate actions to protect our company and all our stakeholders. We've come into this crisis from a position of strength with a sound balance sheet and good liquidity. At the same time, we're assuming a very tough period ahead and we're taking immediate steps to preserve cash by cutting capital expenditures to minimal levels and reducing operating expenses, including measures that we've announced today, such as temporary layoffs and salary cuts across the board. In fact, a lot of the layoff notices have already been given to people. Now to manage through the crisis, we formed a crisis committee in January and together with our executive management committee, my team, we've been meeting 7 days a week to guide the efforts to prepare for and indeed manage CA through the COVID-nineteen crisis.
We have over 10,000 employees worldwide and operations in 35 countries at CAE. So with government regulations and restrictions evolving in real time, you can imagine that we're managing a lot of complexity and we've assembled an incredible team to provide vital decision support. And our actions in this context are focused on 3 main priorities: safety, continuity and strength. If I detail those 3, safety, I mean, obviously safety is our number one priority for our employees, our customers and their families. We've invested in our IT systems and infrastructure over the past few years to enable remote working for employees who are not directly involved in the delivery of critical customer services.
Already 2 weeks ago, under the advice of government agencies, we advised all of our employees around the world who can work on the safety of their homes to take advantage of the systems that we put in place and to do so and that's indeed the way we're operating. Provide essential services to our customers are highly critical to the continuity of their operations, whether they're maintaining pilot certifications to support the low air transportation system, maintaining the readiness of defense forces or supporting our healthcare customers who are on the front lines of this pandemic. We've placed strict hygiene protocols in all of our facilities and we've implemented risk mitigation strategies through shift work of critical resource so that we'll never put our customers down in the time of their greatest need by providing them the essential services that they need to continue to operate. Without that strength, maintaining a strong and durable seed is rooted in our trading strategy and its principal characteristic is offering a high level of recurring income for regulated services. In fact, over 60% of CA's revenues come from and are highly critical and recurring.
The affiliation for pilots to remain active and to continue to hold their certification, they need to train a regular frequency, weekly and with 6 to 9 months. In defense, our work is considered mission critical and our employees at sea are deployed worldwide to actively support defense projects through all conditions. We have a large backlog of single pool stake simulator orders, which has been funded by customer deposits and brokerage payments and we're diversified with an approximate $4,000,000,000 backlog in defense. We've always prioritized being an investment grade profile, which has guided our capital strategy. And I'm confident that with the critical nature of the services we are continuing to provide to our customers, the strength of our financial position and the measures we're taking to adjust our cost base, reduce capital investment and otherwise preserve cash, we'll see our way through this episode before too long.
Charlie, you will see.
Great. Thank you. Thank you very much, Mark. We did have a little bit of difficulty with your line there. So we will continue to unpack a lot of those comments, but it did clear at the end.
I guess just digging right into it, just in terms of operations, what's going on with your training facilities right now? How many of those centers have been forced to be closed? Can the pilots still get to those centers? And what difficulties are you facing in providing the training in this environment?
As of this morning, we have 50 centers on the campus. We have 3 that are temporarily closed.
Hold on. I'm having difficulty hearing.
Steve, I think that perhaps maybe Mark should hang up and try calling back in again. It seems like a bad In the meanwhile, as he does that, perhaps I could provide a bit of an update on the facilities question?
Yes, please do, Andrew.
Yes. So I think Okay. I think as our team get a twice daily briefing in terms of the network status. You can imagine it's very fluid. But as of this morning, we had 50 of our training centers operational, 3 of them have now been temporarily closed and owing to lockdowns and mandatory school closures and border closures around the world, it's making things certainly more challenging.
If we look around the world, Asia is generally opening up somewhat, although we do have to be watchful of any sort of risks of second waves. But we're seeing that Japan and Korea are actually doing well at the moment. Singapore is open and we're training the anchor customer there. There's a more recent 14 day quarantine restriction there that makes third party training much more difficult, but it is operating. Our sector in the Philippines with Cebu, that's closed temporarily under the directives there.
And our center in Kuala Lumpur was closed for a few days under public for school closures, but it since reopened with the authorities determining that we are indeed providing an essential service. And I think that that's a particularly important point to underscore here as we think about training around the world. And we're still training business and commercial aviation pilots in Dubai for the moment. But I think there we're also facing temporary closure. The pilots who are in the centers now will complete their training, but we do see that there are recent government directives there as well.
In South America, things are holding up reasonably well, apart from Peru where we've had to close our center there. So, as you might imagine, given the geographic evolution of the virus, the biggest challenges we're facing at the moment are in Europe. So far, centers in Europe that have temporarily closed include Brussels and Milan. And that's due to the lockdowns there. North America, we've had no closures at the moment, but this is also quite a fluid situation that we're watching in real time.
Okay. I think Mark touched on this in his opening comments earlier, just around the regulations around pilot training. Can you maybe talk a little bit about or explain why the airlines are continuing and need to continue training pilots over the next while, even if their flights are grounded for the time being?
I'm back on, Steve. So perhaps I can take that.
That's great. It's a much better line, Mark. Thank you.
Okay, good. Sorry about that. Look, I think the bottom line is it's a regulated business. So that if airlines are flying at all, I mean, obviously, reduced levels, so is the business aircraft to a lesser extent that probably that was mentioned by Andrew. But if you have to if you're flying, you have to train.
I mean, as I mentioned about every depending on the country, every 6 to 9 months. Now we are seeing in this period of crisis right now that we're seeing some governments like for example in Europe, they're providing some leeway to airlines to be able to postpone their checkouts. I think they're going after 3 months out. That's a temporary measure. We don't see it across the world.
Now they're doing it purposes. They're not doing it for purposes of cost. The only dispensation is that it's literally if airlines just physically can't get to their training centers, so it's very difficult for them to train. So the if you think of examples about this, think about the whole 737 MAX episode, even though the airplane has been grounded well over a year, airlines by and large have continued to train their crews in order to be able to be ready when the airplane resumes the flight. And if they don't do that, and we saw that, I'll give you an example of one airline Southwest Airlines, which basically when they found out that they need a simulator based training on 737 MAX, they had to scramble to train all their crews and that became the long pole in the tent to get in the airplanes back in the air.
And we basically and we were thanked literally by Gary Kelly, their CEO on the call on his investor call because we literally pulled the rabbit out of the hat by providing them extra simulators that they needed at their greatest time of the year. So I fully expect and we're seeing that that airlines are going to continue to train because they have to and they have to be ready for the times that they go back to increased capacity.
Okay. Great points. Just in terms of prioritizing our time, I think I'll jump to some balance sheet and liquidity topics now, which has obviously been very topical with investors. You ended last quarter with debt to EBITDA of around 2.7 percent, debt to cap just above your target range. How should we be thinking about CA's leverage right now, your debt maturities coming up and any covenants on that debt?
Yes. So thanks, Steve. I'll take on that one. And as you know, our capital allocation priorities have always included the constant to maintain a solid financial position. And for us, that's meant maintaining an investment grade profile.
And we're going into this with a sound balance sheet. Our debt consists mainly of private placement notes staggered over 15 years with no major maturities coming due before our fiscal FY 2025. In addition, we have term loans, some banking revolver and operating leases. We don't have any peaks on our debt maturity profile and only about $250,000,000 of debt and lease repayments this year, most of which are towards the end of the next calendar year 2021. On the covenants, we're well below our covenants threshold.
Our adjusted debt to EBITDA covenants is north of 4 times and we've got ample liquidity of over $1,000,000,000 with our cash on hand, revolver facility and AR factoring programs. So we have a solid balance sheet, no significant maturities coming due in the short term and ample liquidity to be able to weather the storm.
Okay, good. So, Mark mentioned earlier some steps you're taking on capital spending to conserve liquidity. Can you maybe comment a little more detail on what those measures might be?
Absolutely. So in addition to all the cost containment and cash preservation measures, we're taking a real hard look at all the investments. Most of the CapEx that we spend is growth CapEx geared to address market demand and capturing growth in the civil aviation market. Of course, with the current uncertainty and the revised view of demand, we have materially reduced all of CapEx to essentially a minimal, very minimal spend for the net foreseeable future until the market conditions stabilize and if warrants future investments and at that time we'll revisit. So in addition to CapEx, another major level of investment is on the R and D and other elements.
And so really we're reviewing all levels of investments to preserve liquidity. And we'll also be reducing our levels of R and D investments substantially to essentially critical deliverables until conditions stabilize.
Okay. I guess moving into that area, R and D and other operating expenses, obviously extraordinary times, but it sounds like some of the layoff efforts have begun. Can you maybe elaborate on the degree and nature of those things and timelines that you're looking at?
Yes, I can take that one, Steve. It's Mark. Look at just repeating something in case you didn't come through at the beginning there. We come to the crisis from a position of strength with a sound balance sheet, good liquidity as was mentioned by Sonia. But at the same time, we're not seeing Pollyanna here.
We're assuming a very tough period ahead. And we're taking immediate steps to preserve cash. You heard the ones that talked that Sonia talked in terms of CapEx and R and D, but we're reducing operating expenses, including temporary layoffs that have already been announced and salary cuts across the board. To give you some details, we notified 465 of our unionized manufacturing employees last Friday that they'll be temporarily laid off effective this Friday. Additional temporary layoffs locally and around the world are inevitable and will follow in short order.
And these will include across the board corporate administration level employees as well. Now the additional temporary layoffs will be determined in my mind and in the coming days as we finalize our business review. Now, obviously, we want to be ready when this comes out, when we come out of this. We expect that this will be temporary. But as I mentioned, we're gearing for a tough road ahead.
So, but to minimize the total number of layoffs and to ensure that we adapt to this crisis together. And as we always do a fee as one company, as one CAE, my executive team and myself are taking a 50% cut in salary effective immediately. Our vice presidents will have their salaries cut by 30%, managers and directors by 20% and all other employees by 10%. In addition to those measures, we put a portfolio of other measures in place to cut discretionary expenses and adapt operations to reduce levels of demand. We're also taking additional steps to reduce our costs, improve our cash conversion cycle, that was very important, and inventory management.
And as Sonia said again repeating myself, we expect minimal investment in our training network as we expect fewer orders from airlines. So I think we're not taking any work. Nothing is off the table, Steve, as you imagine.
Yes. No, that's some aggressive moves very early and appreciate what you're doing there. I guess just looking at that a little bit further, you mentioned earlier the magic questions, how deep and how long. When you do stress testing of your model or run just bridge scenarios, what kind of stress tests are you looking at or what kind of metrics do you look at in the business as you go through this?
I'll take that one. And so given the unknowns right now, we're planning for severe impact that could run for a number of quarters. We need to plan prudently. And of course, cash will be one of the primordial KPIs. Ultimately, our business is resilient because of the regulator and recurrent nature of training and our solid backlog on the simulator product side and defense.
Pilot training is an essential activity and supported by regulations, right. And so the training business, because of its higher fixed non cash fixed cost basis can generate positive cash flow even at lower levels of utilization. We also have a large backlog of civil simulator orders, which has been funded by customer deposits and progress payments and we'll continue to deliver on our commitments there. And we're diversified with a backlog of about $4,000,000,000 in defense. To preserve liquidity and adapt to new market conditions, as Mark mentioned, we're taking significant measures to reduce investments with the turn down on CapEx and other investments and the operating expenses with the temporary layoffs and salary reductions across the board.
In addition, we're showing we're very tightly managing collections and watching cash management and have ample liquidity and watching our liquidity levels with upwards of $1,000,000,000 available to support through the period. So on this basis, I'm confident that CAE has the tools and the ability to weather the storm and resume growth once the episode is behind us and the markets that we serve.
Certainly taking a lot of measures, it sounds like to control all the controllables, your customers, the airlines facing these and perhaps even more serious situations. And they're all looking for support from the governments and all those discussions are underway. Is that something the CA can also pursue with the Canadian or U. S. Or other governments to help weather this?
Yes, absolutely, Steve. In fact, I can tell you, I've penned a letter to Prime Minister Trudeau in Canada here and members of his cabinet exactly on that subject today at a welcoming, obviously, additional source of liquidity. We're also talking in earnest with provincial governments. And not only in Canada, we're active in the United States and around the world because we operate around the world. So and like airlines, they're actually looking for support and we're essential to their transportation system.
So we'll go in mock step for sure. Okay.
Makes sense. We've had a few questions come in from investors here. I'll just grab a couple of these. Back on the simulator orders, you touched on this earlier, both Mark and Sonya. Just how firm are these?
Should we be looking at airlines? Do they have an ability to cancel these orders in some way? I understand deposits have been made, but how about order deliveries or cancellations and new order activity?
Well, I think that the it's very rare that people cancel simulator orders. Even in last financial crisis, I don't think we had I can't remember one. I could be wrong, but if there was, it was very, very small numbers that I would remember. We haven't had any yet. We don't expect them.
They've been basically I mean, if you as I said, well, actually, you couldn't hear at the outset, but when we look at we have a large backlog of simulator orders in place because of all the orders we've won in the last couple of years. And those are funded by through customer deposits. And we've always worked in such a way that basically the build of the simulators are funded by the company deposits. So for a company to cancel, it'd be quite rare because first of all, they need those similarities. They're going to need them.
They might need them later. I mean, I could see definitely some airlines asking us to move some to the right and we have a few do that already. Not many, I would tell you, but a few do that, ask us to move them to the right. But for them to cancel, you got to think they got a large investment already in place with us. And that's how we fund our orders.
I think the good news, if there is any in all this or more positive, I should say, is just in the last week, we received 2 new full plate orders from a customer in China and another in Singapore. And clearly, when I look at that, I think they see they're clearly acting at this as a temporary issue, although very grave. And they're basically getting set up to restart growth.
Just in terms another question that came in from the line here as well that we've talked about. Just how variable is your cost structure? Sonia, you mentioned earlier you could run with lower utilization rates and still make money. What kind of utilization would you look at as breakeven, for example, or just general comments on the variable versus fixed components of your cost structure?
Yes, maybe I could point to the past. During the global the last global financial crisis, utilization got as low as 64% in our network and we continue to generate profit and good cash flow. So as you know, the training business involves a higher investment in capital upfront for the simulators and it's a high fixed cost business, but a lot of that cost base is non cash and then depreciation. So even at lower levels of utilization, training continues to generate positive cash flow. So of course, to adapt to the lower volume, we've put in place a number of measures to adjust costs.
Commercial training centers usually operate 20 fourseven. Some we are reducing the operating hours to reduce the OpEx as well as adjusting the staffing and overheads commensurate with the drop in the volume. And so we're readjusting and rightsizing the cost structure to the new level of volume and the training network even at a lower can generate good or positive cash flow.
How about business aviation? It's been a bigger part of CAE for the past year or 2 and how has that been affected so far?
I think business activity obviously has gone down. You would expect that the flying activity it's been reduced by through basically reduced demand in some regions, obviously, impacted by border restrictions. We're seeing issues mainly with getting customers to the training site. All of our training centers in business aircraft are operating. I think I wasn't on the call at that point.
I think that probably you Andrew went through the level of activity, but we're still considering the circumstances, we're seeing a good level of activity in those training sites, whether it be in Dallas, in Burgess Hill. Dubai is a little bit more tough these days because temporary government restrictions that we see there. But the main issue is just like getting our customers to the trainings sites themselves because of quarantine. The demand has gone down for growth. It's mainly what we see mainly now is a recurring train demand because that's driven by regulation.
I mean, as we said, as is our business, high technician get trained on a simulator, then they have to go to the current training every 6 to 9 months. We're seeing that activity continue. I think the thing to look at in terms of the business aviation as it affects CAE, the health of the business aviation market itself is quite different today than during the period before the global financial crisis and albeit demand is lower today, it's more based on fundamentals than in past downturns. So I think it will be more resilient.
Okay. How about the defense business, the large backlog there and presumably pretty steady, but what kind of impact has that seen so far?
Well, it depends training services programs are service level agreements. So they're not driven by utilization, which is a big change, big difference in that, in civil. We're providing critical services here too. And the U. S.
Government has recently, just in the past few days, recently articulated the absolute necessity of this activity. Some bases have restricted access, such as, for example, that anyone outside 100 mile perimeter must be quarantined for 14 days and we're seeing that in certain bases. But and anything and everything that has to do with the movement and cooperation of people is more challenging in this environment. So we've been impacted in terms of getting orders fulfilled just because of that, getting access to the people, meeting face to face. That also includes impacts on program execution because that involves collaboration with customers and OEMs, installations and so on.
As well, the general preoccupation of the crisis clearly has an impact on the speed of procurement processes. But again, while similarly to civil, we have an approximately $4,000,000,000 backlog in defense, which provides us with a good source of diversification and visibility, albeit we're impacted obviously in delivering that service. Longer term, we don't see an obvious structural impact on defense flow, but I think we can anticipate some short term friction as we move through this period.
We're running close on the clock, but maybe just stepping back a little bit and bigger picture, CAE and the training business in particular lived through 9eleven, the global financial crisis in 2008, 2009 stretching into 10/11, I guess. How different is CAE positioned today versus then and what lessons from that area you're carrying forward?
Well, I think just quickly, the biggest difference is that our business is much more tied to maintaining the regulated 20 of the already in service fleet of airlines and business jet operators rather than just selling simulators. And past experience has shown us that regulated training is going to be it can be reduced obviously, but it's going to be lower amplitude cyclical than a business that sells only aviation products like our simulator business. And with over 60% of our business now coming from training services, we're going to be much more resilient company than we were during either of those 2 Black Swan events. Because in 2,001, we only had 15% services and 2,008 was much lower than it is today. So we're in a much better position.
But I mean, this crisis is a big one. It's obviously, in my mind, it's worrisome, but those two events themselves, but then that's why we're taking the steps that we're taking.
Change creates opportunity and maybe coming out of this, I don't know it's wise to be optimistic at this stage, but is it reasonable to think that the airlines themselves might relook at all of their cost structures and businesses and might there be more opportunities for you with more partnerships or full outsourcing with some of these airlines as everybody regroups?
Yes, absolutely. I think people come out of this generational event looking at life a little bit differently. When you consider the responsibility we have when our customers and trust are trained to CAE and we now have an opportunity to prove to them that CAE is never going to let them down, Even in the worst of times, I think we'll have an opportunity to build on that trust. Among the benefits, the many benefits that and attributes that we bring to the table as training partner of choice, The idea of taking a part of an airline's cost structure and making it variable may become more compelling as the industry stands back from this crisis. We view the market over long term with its ups and downs and there's a heck of a down admittedly, but we're ready to serve our customers with the most innovative, comprehensive train solutions, any strong company that's been proven in the worst times.
We are running up against the clock, but that in itself might be a good way to wrap. But are there any other closing comments or thoughts that you'd like leave with investors?
Well, I don't know what we missed in the beginning, I would say, but I think that, look, clearly, the world is going through a crisis of unprecedented magnitude. This is significantly worse than anything we've ever seen. But it's important to recognize that at CAE, we enter into a position of strength. We have the benefit of a highly recurring business involving regulated pilot training. That's very important.
We're well diversified geographically. I think we can expect the market, if not the world, to come back in line in phases as this biological crisis has passed from one continent to the other. We're seeing some positive signs from, for example, China. To me, it's too early to tell. But as I said, for the fact that we got 2 simulator orders from them in the past week, it was positive, as well as one from Singapore.
We're well diversified in civil aviation with exposure to business aviation, commercial aviation. And very importantly, we have a backlog in civil full flights similar sales, a war chest that should hold for next year barring any quarter seeing cancellation, which so far we haven't seen and don't really expect. We have a large backlog of full flight simulator orders, which have been and those orders, by the way, again, repeat myself, but the orders we have in civil aircraft are funded by customer deposit, progress payments and we're diversified with approximately $4,000,000,000 backlog in defense, The world will return to normal. And to me, all crisis has come to an end. And we still foresee secular growth in air travel.
And finally, but it will be over a longer period. We have the same power and stamina to weather the current storm, but we're not taking anything for granted. We're assuming in this Black Swan event, a tough road ahead for the next few months and we're addressing ourselves that way. So with those additional measures, reduced CapEx, all the operating costs, salary reductions, layoffs, I think gives us the breathing room to get through the end of the turn into the downturn. And Sonia, as my CFO, has prepared us for this, and I feel good about our liquidity position.
I'll just wrap it up with that for Steve.
Great. Well, thank you. That's terrific color. Very much appreciate that today. It's very busy times and we do respect and appreciate your time.
So thanks, Mark, Sonia and Andrew. Please stay well.
Thank you.
Thank you.
Thank you, Steve. You too, Steve. Take care.