Good day, ladies and gentlemen. Welcome to the CAE Fourth 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.
Please go ahead.
Thank you. 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 FY 'twenty two and answers to questions contain forward looking statements. These forward looking statements represent our expectations as of today, May 19, 2021, 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 Chief Executive Officer and Sonia Branco, our Chief Financial Officer. After remarks from Mark 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. Before getting into our results, I'll first share some of my reflections on how we've been managing Through the maelstrom of COVID-nineteen and where I believe CAE is now situated some 14 months later. Sonia will provide details about our financial performance and the restructuring program that we have underway and then I'll come back at the end of the presentation to comment on our outlook. Looking back on the fiscal year, CAE demonstrated tremendous mettle and resiliency fronting the challenges of COVID-nineteen in highly innovative ways and without ever skipping a beat in terms of the critical support that we provide to customers Worldwide, at the same time as we rapidly learn to adapt to a new normal, we leaned in and fundamentally strengthened the company for the future.
We took extraordinary steps to protect CAE, our employees and our customers and I'm extremely proud of our performance and the nobility in which all of us at CAE rose up under such exceptional circumstances. We also secured our future by harnessing our OneCE culture and seized on several strategic growth opportunities drawn from expanded pipeline. We made important progress through the year to significantly enhance CAE's position for future growth. The added financial flexibility from our capital raises has enabled the succession of 5 highly strategic acquisitions that we announced Over the course of the last 6 months, we expanded our ability to address the civil training market by acquiring Flight Simulation Company in Europe and True Simulation and Training Canada in North America and we accelerated our expansion into software enabled civil aviation services With our acquisition of Merlo and RB Group, the latter two helped to solidify our industrial technology leadership and further expand our already large, addressable market. We also announced a major opportunity in defense With our definitive agreement to acquire L3Harris' military training business, which will significantly accelerate our defense growth strategy and align us more closely with National Defense priorities.
We expect to close the acquisition in the second half of the calendar year. Over the course of the year, we also accomplished a lot organically and internally to strengthen our position. We launched new digitally enabled products and business processes, put a comprehensive program in place to structurally lower our cost base And we bolster key talent. The combination of these recent initiatives gives us greater potential than ever for higher growth and profitability in the years ahead. Turning to the results, up against the sharp challenges of COVID-nineteen, I'm especially pleased with what we've been able to deliver in the fiscal year.
In the face of the biggest ever shock in the history of Civil Aviation And major disruptions across the defense and healthcare markets, CE rebounded to quarterly profitability and positive free cash flow After only our Q1, when the brunt of the pandemic hit us, we believed early on that the year was going to be characterized as A tale of 2 halves and the second half was indeed stronger and the positive momentum of our recovery has continued throughout the year and into this latest Q4. On a consolidated basis, we generated $0.22 absolute earnings per share in the quarter and $0.47 adjusted EPS for the year. Order intake was $928,000,000 for the quarter at $2,700,000,000 for the year, giving us a solid backlog of $8,200,000,000 This to me is strikingly positive when considering that global air travel Drop by approximately 90% at the peak of the crisis and 100 of 1,000,000 of dollars in expected defense contract slipped into next year or beyond. With the measures that we implemented and the resiliency inherent to our business, We also generated strong annual free cash flow of $347,000,000 This in of itself Makes an important statement about CAE as a sustainable growth company.
In addition to the positive investment attributes, including secular tailwinds and A cash generative profile, CAE has also proven once again to be a safe port in a storm. Now turning to some of the segment highlights. In Civil, average training center utilization Continued to edge higher reaching 55% in the 4th quarter and we saw sequentially higher adjusted segment operating income margins. We delivered 14 full flight simulators in the quarter and despite market and logistical challenges, we delivered 36 full flight simulators for the year in the Civil business. We also continue to win new orders with $386,000,000 Booked in the quarter and annual orders totaling $1,300,000,000 including comprehensive long term training agreements With airlines, cargo operators and business jet operators worldwide and 11 full flight simulator sales for the year.
Civil finished this year with a backlog of $4,300,000,000 In defense, Orders of $370,000,000 in the quarter gave us a book to sales ratio above 1.1 for the first time in the last 5 quarters. And even with significant expected orders moving out of the fiscal year, defense order bookings reached $1,100,000,000 for a $3,900,000,000 defense backlog. Despite having to contend with COVID-nineteen headwinds in defense, Especially in international markets, we stabilized the business and made excellent progress to position it for future profitable growth. During the year, we secured all of our foundational recompetes and we won significant new competitions in our core market and expanded our position in digital immersion, operational support and security. CAE's mission is to lead at the frontier of digital immersion with high-tech training and operational support solutions to make the world a safer place.
And a prime example of that is how we're positioning defense for the future and bringing our mission to fruition It is an example of that being a recent win of a flagship program in the United States called the United States Special Operations Command or US SOCOM to lead the integration and architecture development efforts for the Special Operations Forces Global Situational Awareness Initiative. I really want to underscore the significance of 2 defense of our fiscal 2021 wins And in particular this U. S. SOCOM program and I'll comment more on them in my outlook. Turning finally to healthcare, We completed deliveries of the CAE Air 1 ventilators during the quarter and we reached record level quarterly revenue even before the contribution from ventilators.
Our ventilator initiative was an important humanitarian effort that had the added benefits of generating incremental cash flow and providing employment during a time of crisis. And the speed and effectiveness with which we developed and delivered the CAE Air 1 It's a testament to the unique combination of CAE's agility, our deep subject matter expertise in healthcare and the vast industrial and technological capabilities of the company. During the year, healthcare continued to bolster its position As the innovation leader in simulation based healthcare education and training through the launch of new AI enhanced training tools and digital management solutions in support of our customers' training needs during the COVID-nineteen pandemic. We also launched CA SimEquip, Simulated Medical Equipment and we continue to develop transformative digital training solutions for OEMs and leading medical device companies including Edwards Lifesciences and Quartus, a Cardinal Health Company. With that, I'll now turn the call over to Sonia, who will provide a detailed look at our financial performance.
And I'll return to the end of the call to comment on our outlook. Sonia?
Thank you, Mark, and good afternoon, everyone. We continue to see good sequential performance improvements in the Q4. Consolidated revenue of 890 $4,300,000 was up 7% compared to the 3rd quarter and is 8% lower compared to the 4th quarter last year. Adjusted segment operating income was $106,200,000 compared to $97,200,000 in Q3 and $193,900,000 last year. Quarterly adjusted net income was $63,200,000 or $0.22 per share compared to $0.22 in Q3 and $0.46 in the Q4 last year.
For the year, consolidated revenue was down 18 percent to $3,000,000,000 and adjusted segment operating income was down 52% to $280,600,000 Annual adjusted net income was $127,100,000 or $0.27 per share, which is down 65% compared to $1.34 last year. Our disclosure this quarter provides the impact of the Canadian emergency wage subsidy and other COVID-nineteen government support programs. We have highlighted the impact on some key metrics. During the period, we carried higher employee costs than we would otherwise have been carrying as amounts received from COVID-nineteen government support programs either flow through directly to employees according to the objective of the subsidy programs and the way that they were designed in certain countries All the amounts were offset by the increased costs we incurred in revoking some of our initial cost saving measures, including eliminating salary reductions bringing back employees who were previously placed on furloughs or reduced work leads. As such, we have been operating with Higher expenses than we would have in the absence of STEWS, and so the impacts of the government support programs are almost entirely neutralized.
Our global training operations are especially cash generative in nature. Net cash provided by operating was $174,600,000 for the quarter compared to $246,300,000 in the Q4 last year And for the year, we generated $366,600,000 from operating activity compared to $545,100,000 last year. We had a strong free cash flow in the quarter of $170,600,000 $346,800,000 for the year, which compares to $351,200,000 last year. We continue to target an average conversion of net income to free cash flow of 100%. Uses of cash involve funding capital expenditures for $50,500,000 in the 4th quarter and $107,600,000 for the year, incremental capital with attractive returns and free cash flow.
With our current view of attractive market led expansion investment opportunities, We expect total capital expenditures to more than double in fiscal year 2022 versus the prior year. Income tax recovery this quarter was 3 point $1,000,000 representing a negative effective tax rate of 21% compared to an effective tax rate of 25% for the Q4 of fiscal 2020. Tax rate was low because of the restructuring costs we incurred this quarter. Excluding the effect of these elements, the income tax rate would have been 16% this quarter 19% for the year. Net debt was $1,400,000,000 at the end of March for a net debt to total capital ratio of 30.7%.
This compares to $2,400,000,000 or 47.8 percent of total capital at the end of last year. Net debt to adjusted EBITDA was 2.38 times at the end of the quarter. All told, between cash and available credit, we have approximately $2,700,000,000 of available liquidity. CAE's liquidity was further enhanced The completion in March of a marketed cross border public offering of common shares for gross proceeds of $358,500,000 As at March 31, 2021, we had a higher cash balance on hand from our recent equity issuances and these proceeds will be used to on the proposed L3Harris Military Training Business Acquisition and other potential growth investments in our pipeline. On the restructuring front, we are continuing to make good progress.
The program is enabling CAE to best serve the market by optimizing our global asset base and footprint, Adapting our global workforce and adjusting our business to correspond with the expected level of demand and structural efficiencies that we'll be enduring. While maintaining our presence in all markets, we've made excellent progress consolidating our global footprint for greater efficiency and to better serve our customers. In the U. K, we have consolidated 5 locations into 3. In Europe, we are in the process of consolidating 17 training locations into 13 In addition to optimizing certain remaining locations and in South America, we are moving from 6 to 4 locations.
We began executing our restructuring program in the Q2 and as at the end of March, we had incurred a total of 124 $1,000,000 of restructuring, integration and acquisition expenses for the entire year. In fiscal year 'twenty two, We expect to incur approximately $50,000,000 in additional restructuring expenses related to this approximate $170,000,000 program. We continue to expect to realize significant annual recurring cost savings, wrapping up to a run rate of approximately $65,000,000 to $70,000,000 by the end of the new fiscal year. Now turning to our segmented performance. In Civil, 4th quarter revenue was down 6% compared to preceding quarter and down 36% year over year to $388,200,000 I would note that revenue is generally not the most representative metric for Civil given that there is no recognition of our share of revenue from the large number of joint ventures that we operate around the world.
And in fact, part of the utilization increase that we saw in the quarter was the result of stronger performance in regions where we operate under joint ventures. Civil performance is better represented by adjusted segment operating income, which is up 7% sequentially and down 57% year over year to $66,600,000 for a margin of 17.2%. For the year, total revenue was down 35 percent to $1,400,000,000 and adjusted segment operating income was down 60 In defense, 4th quarter revenue of $334,400,000 was up 12% compared to the preceding quarter and down 2% over Q4 last year. And adjusted segment operating income was up 4% over the preceding 3rd quarter and down 42% over last year to $23,200,000 for an operating margin of 6.9%. For the year, defense revenue was down 9 percent to $1,200,000,000 and adjusted segment operating income was down 24% to $87,000,000 representing a margin of 7.1%.
The defense book to sales ratio for the quarter was 1.11x and for the year was 0.91x. And in Healthcare, 4th quarter revenue was $171,700,000 up 42% from the preceding quarter $16,400,000 in the quarter compared to $12,900,000 in the preceding quarter and $100,000 in Q4 last year. For the year, healthcare revenue was $351,900,000 up from $124,500,000 and adjusted segment operating income $29,300,000 representing an increase of $32,800,000 compared to segment operating loss of $3,500,000 last year. For comparative purposes, the CAE Air 1 ventilators contract with the Canadian government contributed $130,000,000 to the 4th quarter revenue $230,600,000 for the year. With that, I will ask Mark to discuss the way forward.
Thanks, Sonia. As we look to the period ahead, I'm highly encouraged by all that we've done to reinforce CAE's base over the last year and to expand our horizons for long term sustainable growth. True to our vision to be the partner of choice, We exercised great agility and collaboration as 1 CAE to quickly and effectively protect our employees and our customers, which has engendered even greater loyalty and engagement. And like few other companies, throughout the turmoil, We executed a series of 5 highly strategic acquisitions. We raised equity and fundamentally repositioned the company for the future, while at the same time launching new products, investing into new growth adjacencies and structurally lowering our cost structure.
CAE is indeed a unique company with a highly talented team and a shared culture of innovation. I expect that we will continue to make important strides to enhance CAE's position for future growth. We are focused on the successful Integration of our 4 civil acquisitions and our closing acquisition of the L3 Harris Military Training Business. We look forward to realizing the very significant potential of the combined businesses to better serve the needs of our customers. And at the same time, We've ensured that we continue to have the financial flexibility and the bandwidth to cultivate a large pipeline of sustainable growth opportunities, including the deployment of expansion capital in highly accretive and sustainable areas like training and to expand our reach and strengthen our position As an industrial technology leader, we're leaning in and focusing on the long term, bolstering our Standing as the global market leader in our field through the application of advanced technologies and by expanding the aperture of our market reach And we continue to invest in CAE's capabilities to revolutionize our customers' training and critical operations and increase market share with Digitally Immersive Solutions.
In the short term, we continue to expect to trend positively There is little doubt that with all that we've done in recent months internally and externally to enhance our position, We'll see strong growth for CAE in the fiscal year 2022. The exact slope of CAE's recovery, The pre pandemic levels and beyond is dependent on the timing and the rate at which travel restrictions and quarantines can be safely lifted And normal activities resume in our end markets. The global rollout of vaccines to combat COVID-nineteen is highly encouraging And I believe that the summer months will be very telling. This is especially the case obviously for Civil where we believe that there is considerable pent demand for air travel and we are already seeing this manifest in regions like the United States where domestic air travel is ramping up strongly. We're also highly encouraged by our prospects for renewed growth and profitability in defense.
The expense of which is in the current fiscal year will depend on Among other initiatives due to the potential and timing of closing of the L3 Harris Military Training Business acquisition. Taking all of those variables into account, we expect to have greater clarity and be in a position to provide a more precise growth outlook fiscal year 2022 when we report our Q1 results in August. And as we look further out, I'm more confident than ever before in CAE's future. Our strategy and positioning are very well aligned with a post COVID-nineteen business In geopolitical landscape, we'd expect the secular trends favorable for all three of our business segments. Greater willingness to outsource training by airlines, higher expected pilot demand and strong growth in business jet travel Our enduring positives for the Civil business.
The paradigm shift from asymmetric to near peer Threats and recognition of the sharply increased need for digitally immersion based synthetic solutions in national defense are tailwinds that favor CAE's defense business. And Healthcare is poised to leverage opportunities presented By a growing awareness and appreciation of simulation and training to make healthcare safer. If we look specifically at Civil, We continue to see training demand proceeding to return to air travel as airline capacity and the associated crews are prepared to reenter service. Domestic air travel is coming back faster, especially in regions with a more advanced ramp up of vaccinations, While cross border and transcontinental operations are lagging as they are more tied to the easing of travel restrictions. In the United States, we currently have requests and indications that pilot hiring will resume in the next couple of quarters And we're already hiring instructors in support of our regional aircraft customers.
We expect to continue Expanding our market share and securing new customer partnerships drawn from a large pipeline of airline prospects. We've made very good progress in last year having signed exclusive training agreements for supplemental training capacity on narrow body aircraft with 6 customers including major airlines in the Americas and aircraft OEMs as well, which is often an initial step towards a more comprehensive outsourcing. We've also signed exclusive training agreements with 6 new start up airlines That have elected to bypass the in source training model altogether. Our growth in commercial aviation training in fiscal year 2022 We'll come from these new partnerships, additional partnerships that we expect to conclude from our pipeline and of course the general improvement in flight activities involving existing customers as restrictions ease. We also expect to see the benefits of the lower structural cost base that we've achieved as the recurring savings ramp up towards the end of the year.
In Business Aviation Training, Flying activity has recovered much faster than commercial and with levels of demand in the United States nearly back to 2019 levels, This bodes very well for training demand in this highly important segment of the civil training market. Civil full flight simulator sales are driven by new aircraft deliveries and while the total market remains small at present, We expect to maintain our leading share of available Full Flight Simulator sales. We still have the benefit of a large backlog of customer funded Full Flight Simulator orders and we expect to substantially deliver this backlog over the next couple of years, including upwards of 30 and fiscal year 2022. Over the last couple of years, we've been steadily unifying the digital flight operations ecosystem with the goal of delivering a holistic suite of solutions designed to improve operations and enhance the crew experience while Further increasing our large addressable market in civil. Our vision began in 2018 with the acquisition of PELASYS, An aviation training courseware developer and publisher with one of most comprehensive training and compliance systems in the industry And we expanded on this vision with the launch of CAE RISE, our predictive management and training visibility system.
In the period ahead, we're going to continue to expand our reach beyond pilot training solutions into the rapidly growing market for digitally enabled crew optimization services. The acquisition of Merlot and RB Group are building blocks that allows CAE to provide an end to end offering of crew performance software that extends from training to optimize crew operations and is unique in the industry. We're also positioning in the advanced air mobility market, which we believe will become another secular driver for pilot training and demand for Xi's expertise in modeling and simulation. Last week, we announced that CAE had been selected by Jant Air Mobility to lead the design and development of the Jant Aircraft Systems Integration Lab for the company's new all electric vertical takeoff and landing aircraft, the Journey aircraft. By leveraging Sea's Extensive experience in high fidelity simulation, we are going to work hand in hand with John to bring best in class simulation and modeling to the aircraft development program from the inception of this program.
In defense, at the same time as We stabilized the defense business in fiscal 2021. We positioned the business for future profitable growth and I'm encouraged by our new competitive wins and large pipeline of programs to specifically call upon CAE's expertise in the synthetic domain. Importantly, as I introduced in my opening comments, Defense won all of its foundational recompetes, Including the U. S. Air Force KC-one hundred and thirty five Air Crew Training Systems contract, which also in this contract adds training support services for the Air National Guard Boom Operator Simulation Systems.
We also secured a critical follow on for the U. S. Navy T-forty four C Instructional Services. These wins underscore the strength of our recurring base of core programs in defense And new fiscal 2021 competitive wins in our core markets add to that base, including United States Army Advanced Helicopter Flight Training Services and the France Germany C-130J Training Solutions. We also signed agreements with Boeing to provide P-8A training support services for the United Kingdom Royal Air Force and with General Atomics to continue the development of a comprehensive synthetic training system for the UK Protector remotely piloted aircraft program.
The Protector is General Atomics' 1st major MQ-9B sale, Their next generation platform which is expected to sell 100 worldwide with CAE providing its training support. We also expanded our position in the security market with an agreement for United States Customs and Border Protection Aircraft Pilot Training Services And we added to our customer base at our Alabama based Dothan training center with the provision of training for the Irish Air Corps. Defense also expanded its position in digital immersion with notable wins including the United States Air Force Advanced Battle Management System and the UK single synthetic environment. The announcement earlier this week of our selection by the United States Special Operations Command for the soft global situational awareness initiative is strategically noteworthy. After a highly competitive process beginning with over 100 companies including some of the largest defense OEMs and Silicon Valley entrants.
CAE was awarded a US135 $1,000,000 contract to deliver the scalable next generation mission command system that unifies the special operations forces enterprise Through the creation of an integrated common operational picture called the Mission Command Systems Common Operational This system will deliver enhanced global situational awareness to the U. S. Special operators around the world. Sea's digital ecosystem solution leverages our world class modeling simulation expertise Beyond training by integrating data analytics, artificial intelligence and digital immersion technologies Into a synthetic environment to create a powerful tool for analysis, planning and decision support. This technology is a critical enabler for United States and Allied Forces to successfully train and operate across all five Battlespace domains, a mandate that's laid out in the U.
S. National Defense Strategy. Our priorities in defense are focused On the long term investing in our leading position as a training and mission support partner with leading edge capabilities in digital immersion. We're also enhancing our position by laying the groundwork to strategically team with major OEMs on next generation platforms. With our expertise in integration of live, virtual and constructive training, along with capabilities to address missions and operations support, We believe that we will make significant inroads in the broader defense market in the years ahead.
Defense is well positioned to capture business around the world, Accelerated with expanded capability and customer set following the expected close of the L3Harris Military Training acquisition. And lastly, in healthcare, we're capitalizing on a greater market appreciation of the benefits of healthcare Simulation training to improve safety and to help save lives. I continue to be encouraged by what our new team has been able to do and I look forward to gaining Sustainable scale with our innovative solutions to make healthcare safer. Healthcare has been and continues to be An important dimension of CAE's social profile and CAE has been as recently spearheaded The Industry for Vaccination Coalition by gathering support for companies and their CEOs across Canada. The goal of the coalition It was to accelerate mass vaccination through the private sector at no cost to governments to restart the economy as soon as possible.
CAE converted 12,000 square feet of conference rooms into a world class operational vaccination center, which opened on April 26. In addition to the critical role it serves in the ramp up of vaccinations in Quebec, it's really a great example of CAE's corporate citizenship and a source of great pride for all of us at CAE. In summary, a year and 2 months after the pandemic began, The investment thesis for CAE is more compelling than ever. And I strongly believe that we'll achieve new heights in growth and profitability in years ahead As we bring to fruition our recent acquisitions, our new digital products and our expansion investments, our bolstered leadership and our operational efficiencies. And with that, I thank you for your attention.
We're now ready to answer your questions.
Thank you, Mark. Operator, we'll now open the lines to members of the financial community.
You will hear a 3 tone prompt to acknowledge your request. If your question has been answered and you would like to withdraw your registration, please press the 1 followed by the 3. One moment please. The first question comes from Fadi Chamoun of BMO. Please go ahead.
Okay. Thank you. Good afternoon, everyone. Hi, Patrick. A couple of questions.
First on The CapEx, you're indicating more than doubling versus $100,000,000 First, can you kind of give us Framework like is this something based on what you have in the pipeline, if you can narrow down that kind of guidance a little bit, is it Something in like $200,000,000 to $250,000,000 And more importantly, where are you seeing these opportunities to deploy more capital? Looking at your utilization rate, which is more of a consolidated number, it looks like you have a lot of room to grow into, but I'm just curious where these opportunities to grow All showing up.
Well, if you don't mind, some of that I'm going to be a bit circumspect because of competitive reasons. But I think broadly where we feel confident in that CapEx number is because we're seeing the opportunities That we've had with conversations with customers both on commercial and business aircraft, where we can deploy Asset simulators either to if you like, I talked about overflow agreements on commercial aircraft. So you might not have seen a complete outsourcing, but you've seen a lot what we've seen though is with Secura as I said in the remarks, a number of Agreements with airlines that we have if we deploy the capital, we can and We can basically get over for agreements that can be converted to a long term training contracts, especially on narrow body aircraft. At the same time in Business Aviation, we see quite an attractive opportunity in a number of locations to deploy Business Aviation Assets and of course both of those generate some of the best returns. This growth CapEx that It's 20%, 30% incremental return on capital employed after a very short amount of time.
So we'll invest in those every day, Louis.
And if I just add, so in the review and the continual With you on our capacity, we absolutely redeploy assets if 1st and foremost before issuing new CapEx. But Opportunities, like Mark mentioned, they vary by platforms, right? So the overall utilization metrics is probably not the best. And so where we see demand in our pipeline and Like Mark said, it drives nicely accretive returns, 23% range within the 1st few years of deployment. So essentially that leads us to the guidance, which
Okay. My second question is on The restructuring and the cost savings associated with it, how much of the savings have you realized in 2021? And I'm just curious kind of if you have a way for us to think about how Those savings play out into 2022. You're saying like by the end of the year, the exit rate would be $65,000,000 to $70,000,000 of cost savings. So what would you expect in terms of contribution for the year overall from those cost savings?
Yes. So as we said, it's going to ramp up during the year. We started to see some savings, but I think it's really going to start kicking in, in FY 'twenty two And ramping up to, like you said, around $65,000,000 to $70,000,000 by the end of the year. So this will be more back ended into the second half. And we're really kind of progressing quite well.
As I mentioned in my remarks, we're essentially completed in the UK, Going from 5 training centers to 3 and closed out some centers and so on. So that's savings that will kick As of now and so on, some elements in Europe still underway in South America. But essentially, what we'll see is a ramp Quarter to quarter with a heavier preponderance in second half as we kind of finalize some of these and reaching about
Thank you. The next question comes from Konark Gupta of Scotia Capital. Please go ahead.
Good afternoon and thanks for taking my question. So maybe the first one on Civil. I wanted to ask you, the revenue and SOI, Excluding government support were softer than what you saw in Q3 despite utilization rate and similar deliveries increasing sequentially. I guess J. Rice:] Joint venture accounting obviously creates some noise here, but can you share any color on S wide decline sequentially, including perhaps any
I can start it off. I think revenue is never a perfect metric in the Civil business or actually in all of our business, but certainly in a quarter. But I think you're seeing what you're seeing part of this in terms of the sequential revenue story It's a nuance in our business that nearly 50% of our business there are accounted as JVs, It doesn't show up on revenues. So the majority of the JVs that we have happened to be outside of the Americas and that's What we've seen in this quarter relative to previously is where we've seen the biggest sequential pickup in trends. So again, you're not seeing that revenue pickup, you are seeing it in the SOI, but you're not seeing it.
So that's one subtlety there. At the same time, So you talked about all the moves that we're making in terms of achieving a restructuring benefits, but a lot of that involves moving simulators around and We're taking advantage of the period that we're in where obviously training is at lower levels that it would be in a steady state. So we're taking that opportunity to move those simulators around. So you're not going to see any revenue from those at the same time. And frankly, and there is mix as well.
There is mix there always is, but there is mix in this quarter, but you want to add anything to it,
Yes. So to speak to the utilization, it did go climb from 50% to 55%, and we saw some improvement in the Americas. But A lot of the progression was in certain regions where we do have more joint ventures, like the Middle East, right. So what that's did is contributed To the SOI growth and just to kind of correct you or clarify, there was sequential SOI growth of 7% Quarter over quarter. And that's why we usually indicate that this is the best metric on the civil side because it captures everything.
So that increase in joint ventures translated in quarterly pickup in FY and that's also one of the elements that's driving the margin improvement. On the revenue side, like Mark mentioned, a bit of disturbance because we do have we did Take the opportunity and the advantage to relocate several a lot of these simulators so that we can finalize Certain regions like the U. K. And so on and progress on the savings. And so that disturbed the revenue for a bit, but ultimately, We saw the contribution flow through on SOI with that sequential increase to $66,000,000 from 62,000,000 And on the margin, that joint venture was a bit of a driver because it has the SOI without the revenue.
And also on the product side, we did have a good margin mix on the deliveries that we had in the quarter.
Thank you. I was actually referring to the SOI decline excluding the government But I guess as you pointed out before on the call, there's also kind of costs associated with the COVID, right? So that might make sense.
Yes. So on that front, Connor, Just a I guess it's a new element. It's not necessarily new. We've been disclosing the government support program since the beginning of the fiscal year. The update this quarter is that we've added new non GAAP measures to kind of reflect the impact, I guess, that give it more visibility and to incorporate Some new reporting guidances and so on.
But what we look at is the adjusted SOI because this metric so it shows the contribution benefit, but doesn't show The adjusted the adjustments to the heightened operating costs that we've incurred, which is essentially neutralizing all the government programs. So we should look at it On the adjusted SOI basis and on that basis, it grew quarter over quarter.
Let me just pile on to that because I see the confusion there. I think it's a very important quarter that when we look at the profitability of the civil business with all the noise that is there, The number that we use to manage the business is that 17.2% adjusted SLM margin and that's Versus 50 it was 50% in Q3, that's really what we're looking at the management business and going forward there's going to be a less of Noise because shoes just won't be there. So I think I mean you can use that as the benchmark to measure our progress going forward.
That makes perfect sense. Thank you for clarifying. And my second question is on free cash flow. So I think the commentary you made and the Free cash flow conversion continues to be 100% almost on net income this year. Conversion was obviously significantly higher last year because the CapEx was down.
But how should we think about free cash flow Generation ABILITY this year compared to pre pandemic levels. And if you can comment on the CapEx to Fadi's question, How much should we expect for growth CapEx versus maintenance CapEx in your guidance?
Yes. For the total CapEx, I think we'll stick to the guidance that we've provided that Overall, it will be more than double this year's in total, and I think you can use past trends to kind of So that was maintenance and CapEx. I think those will hold true. In terms of free cash flow, I think In this very tumultuous year, we've really demonstrated how cash generative this business is even at very low levels of So ultimately, we've always targeted in the past 100% conversion of free cash flow and we'll do so again for FY 'twenty 2.
That's all my questions. Thank you.
Thank you. The next question comes from Noah Oppenheimerck of Goldman Sachs. Please go ahead.
Hi, good afternoon, everyone.
Good afternoon. Hi.
Just to make sure I have the new or additional disclosure around the margins correct, Mark, would you expect The Civil segment margin, the 17.2% you were just referring to, would you expect to see Continued sequential improvement from here, from that level even as the government support programs roll out.
I think on the SESO wide level, definitely we would expect continued growth in that number just because we're going to throwing we're going to be throwing more Revenue of quasi fixed assets, I mean, the only thing I'll say there is you got to watch I mean, we're in a funny kind of market obviously because Of COVID, but typically what you would see the summer months as you see, where airlines are flying more, they're not training as much, we see seasonal effects That will probably be less pronounced this year, but on a run rate basis definitely as your volume increases in the next few quarters, You have an ST SOI pickup from the volume of activity from the restructuring activities that we put forward. So there is no doubt about that.
Yes. So on a financial basis, this government program and these heightened operating expenses essentially neutralize. And so minimal financial impact on a net basis for the year. And so the adjusted SOI is really the basis on which we're We're providing the guidance and so on. And so ultimately, what this program allowed us to do is keep employees on through the worst of the pandemic.
And where volume of activity has returned, we have the employees to operate and serve our customers. And where it hasn't, we've made the required reduction. And so the growth or the guidance that we're giving is on these adjusted metrics. Now the margin can fluctuate based on mix, but that's the biggest.
Right. So, Sonia, what you're saying is, it's not just that you have The government programs and then you also have just other cost and disruption and that we should adjust for 1, but not the other. What you're saying is there's cost in the system that you otherwise would have been able to manage that you're just not managing because you have the government Support and so we should think of those as neutralizing?
Correct.
Okay.
Could you elaborate on what you saw in the utilization rate within Civil by Large Commercial Aerospace versus Business Jet and maybe a little bit more by geography?
Yes. Business Aircraft is doing pretty good. As I said, the U. S. In terms of flying activity, It's pretty much back to COVID-nineteen levels, which is quite astounding, which is really yes, prior to going back to 2019.
So, You can expect that that's resulting some pretty good training activity in our civil training center. It's a bit slower in Europe because of all the continuing Lockdowns in Europe, mainly people, less ability to fly, but even that is recovered faster than you Commercial Aviation just slower than the United States. If I go around in Commercial Aviation, it's We are a worldwide business. So, your question I think is apropos because really the big pickup for us will be when the big pickup occurs Throughout the world, but what we're seeing regionally is like it in the United States for commercial aircraft, we're actually starting to see utilization match Pre pandemic levels, we're actually adding capacity and we're hiring structures to support wet training with a lot of airlines and our flight school Classes are now looking to resume and really full force this summer. And with the voluntary furloughs that occurred over the past year in the United States, The airlines are seeing a higher need for future pilots as they really need to eventually replace everyone that's left and they can no longer be called back.
We're seeing we talked about this training bubble before and we're starting to see that, but It depends on which geography you're in. In countries where we saw a sudden halt in operations and training, We're seeing the spikes in our training center utilization as the airlines rush to get their pilots current again. Good example of that was Recently in Colombia where we really work we were working really hard, I'd say we're above 100% in our training center to support specifically Avianca They decided to get all our pilots current again. And obviously it depends on the timing, but we're going to see this happen To me, across most of the locations where there was pretty drastic lockdowns, if you look at again going Regionally, you see the India, our utilization notwithstanding the drastic situation that you see, which is horrific in terms of The deaths coming from COVID-nineteen, the utilization in February was over 90% just as the domestic marketing was making recovery. Obviously, that slowed down for good reasons, but and if I could go around the world, but you're really If you were to basically look at where the remaining lockdowns are, where you have travel restrictions, then Basically, you're seeing a subdued level of training activity and where you're not like in the United States, you're seeing People return to travel quite heartily and I'm very encouraged by that and I think that will show up In our numbers over the next few quarters, no doubt about that.
So Mark, if you were it sounds like if you were able to disaggregate that 55 In training related to domestic U. S. Or something a region and type of flying like that that's strong, The utilization rate for you is pretty much back to pre pandemic and it's just that the utilization rate in domestic places that still have a lockdown or related to cross border It's still below the 55.
Pretty much, pretty much because again the other factor to look at is that Really what's picked up is narrow body domestic travel and again that's what's picked up in the United States. So the statement you just said I would agree with, What's still pretty slow is wide body, oceanic, because again of the restrictions and
Thank you. The next question comes from Tim James of TD Securities. Please go ahead.
Thanks. Good afternoon. Thank you for taking my call. Just my first question, Mark, you kind of touched on earlier in your commentary about, I think about some of the kind of opportunities for commercial airlines that may be looking to outsource And that's always been kind of an opportunity for CAE. I'm just wondering if you can kind of update us on now as we kind of come out of the pandemic, Any kind of areas where you see more regional opportunities or maybe just the way customers are Thinking about this and if the pandemic has influenced their thinking, it's really going to kind of accelerate some of that outsource and just any additional color?
I think I see the same thing that I've talked about previously before. There's much more conversations. We're still at a state where The majority of the world barring it, like I said, perhaps the United States are still really dealing with Yes, severe restrictions. If you look at the situation in Canada, I don't need to describe that to you because you live here, but the fact is airlines In a large part of the world are still really trying to figure out what their fleet mix is going to be. If you don't know what your fleet mix is going to be versus a number of narrow bodies versus wide body, the kind of routes that you'll be flying, it's pretty Difficult to really decide on what you can outsource, the old adage is used this example before, but you don't outsource a mess And because either 1 or 2 things are going to happen, either you're going to pay too much or us at We're not going to make a good deal, because we don't have a good basis on which to base a outsourcing agreement.
But I take comfort by the fact as I mentioned that perversely COVID-nineteen has been a great time To start an airline for a number of reasons as I don't need to highlight. So of this we secured contracts with 6 startup airlines that are Going straight to basically to the position that of course we project is to say why would you start a training Operation, when we can provide a turnkey solution for you. So we're 6 of those start up airlines that what we're doing. And at the same time, we've deployed Training in our various centers and in customer centers We're similar with long term overflow contracts whereas before and that's really airlines saying, hey, I'm not going to invest necessarily Any asset, what I'm going to sign a contract with you and because I really don't know, but I want to flex it. I don't know what The ban is necessary going to be, but I need to maintain that optionality, so they can seize the upside in the market and that's attractive because That always is the genesis for outsourcing, because our business model and I think you follow us for a long time, you've seen it.
It's always entered into a relationship whether it be a simulator, whether it be running their training centers, Doing some training overflow and more and more expanding our relationship, expanding our wallet share with customers. I feel very good about that and Again, lots of conversations, but I'm a patient man, but I'm confident that that patience will pay off.
Okay. That's helpful. Thank you. And then just my second question, I'm thinking about Kind of the upcoming fiscal year and some of the acquisitions, well, I guess, in particular, 1 or 2 acquisitions that you've made in the civil space and the new Simulators that you've got in the network, is there a need to or will you be continuing to kind of relocate, move around this year. And am I correct in thinking it's kind of a good time to be doing that because utilization is still relatively low, whereas if you were sort
of running Flat out, it would be a bit more disruptive or are you kind of at the point now where
you feel pretty good with the location of Sims throughout the network?
No, we've been doing that the big part or a big part of our restructuring program is exactly that, Tim. And as I mentioned, we've done a lot of that in the Q4. We're going to do some more, but I think that's going to calm down and that's where really you're going to see a lot of the restructuring Savings come from, because we're taking advantage of exactly the fact that there's reduced level of activity To be able to do those moves, so you don't have to do it in a steady state, so absolutely right.
Great. Thank you. Thank you. The next question comes from Cameron Doerksen of National Bank Financial. Please go ahead.
Thanks. Good afternoon. Just really one question for me and it's, I guess, around the foreign exchange and the fact We've seen the Canadian dollar strengthen a fair bit here in the last few months. I guess in the past, this has been kind of a net negative from a, I guess, a revenue growth perspective. But Sony, maybe you can sort of remind us of the FX impact on CAE and whether that's changed from where it was a couple of years ago And also if you have any sort of sensitivity around FX changes and what that means to either of operating income or to EPS?
Yes. So you're right. It is a bit of a headwind, largely as a result of the translation. And so obviously, it really depends on where the revenues are earned and so on, so the sensitivity evolves. But ultimately, what I use as a rule of thumb is $0.01 on the USD CAD.
The whole year is about $2,500,000 of SOI impact.
Okay. You said $2,500,000 SOI? Okay. Just on translation. So the in training centers, especially, I guess, the revenue and the costs would generally be aligned?
That's right. So margins would be similar, but the translation would come into a lower Canadian dollar equivalent.
Got it. Perfect. That's all I had. Thanks very much.
Thank you. The next question comes from Kevin Chiang of CIBC. Please go ahead.
Thanks for taking my question. Maybe just A clarification question. Mark, you talked about what you're seeing from a utilization perspective by market and a lot of it is being driven by, guess the level of openness those respective economies have, but wondering as Some countries look at how quickly demand has improved or air traffic demand has improved in short order. And Looking at the U. S, I think we're seeing a pretty strong rebound here.
Are you seeing airlines in markets that are more locked down, Potentially accelerating their training efforts to maybe prevent any bottlenecks, if they think that their own domestic Air traffic trends could experience a similar surge like the U. S. Airlines have seen the past few months here Or are they waiting for more clarity before making that type of training decision?
It depends. It depends. I think I was making as highlighting in the Question from Noah is exactly where CFC net like for example in South America, I was using the Example that Avianca really decided to get all their pilots trained. So we had a bubble there where we are operating at north of 100% in Crane Center in Colombia. And so that's an example here.
Right now, if you look at some of the countries, Chile is in full lockdown, Brazil, no surprise, still battling very high cases. So we're going to see so necessary the flying activity isn't there. We're seeing airlines hunkering down, but that will come back. And when that comes back, I would fully expect That we're going to see similar kind of story that we saw in Colombia. Asia Pacific, many countries have if you just Read the newspapers, right, that many countries have pulled back on opening up the green channels that they had due to what's happening in India.
Malaysia declared a national nationwide lockdown again. So if you look at our utilization numbers overall, You can well imagine that we're a key partner to AirAsia, which is the Southwest Airlines, if you like, of Southeast Asia. And So, you can well imagine that the Malaysia is locked down and we're not doing too much there. I Talked about India, what's happening. We have been high in India, that's coming back down.
So not surprisingly, I don't think think it's pretty mixed situation over there. In Europe, we've seen basically it's a day by day situation and I was encouraged I see some opening up recently that were that they are telegraphing that they allow us tourist travel in within Europe right now. So, that's very good positive. We see I could go around, I could go on and on, but you see port schools possibly lifting as early as May 17, but I tell you those less happened. It will be slow and I think airlines have been cautious in terms of their But then you go to other areas like for example in Japan, where Japan Airlines has never missed a beat.
They know that training center is operating at very high levels Because they've taken the fact that they're going to take basically the opportunity throughout this to maintain their pilots fully trained. Overall, I think if you look at our business in aggregate, I think what we've said before is look at the AIDA growth path. We're not getting ahead of the AIDA Growth path that's predicted. But having said that, what I'm very encouraged by The level of flying activity at IC in the United States and I think that will be reflected. I don't think anybody is going to take flying for granted anymore.
That's a fair comment and great color. And maybe just a clarification point. Within healthcare, the CAE The AR1 ventilator, you've completed the deliveries in the fiscal 4th quarter. Is there a reason why you can't sell that to other governments? Are there other Hospitals, is there a reason why this is a kind of a non recurring revenue stream?
Or is this something you can actively sell to other customers here?
Well, I think what you're seeing there is our discipline. We remain focused on what we're good at and what you saw specifically with the example of Van Letter What you're seeing is what CAE can do. And I always point it that way. You take the fantastic subject matter that we have in healthcare where we understand everything to do with the training For intubation and everything to do with the use of ventilators, so we were able to seize that subject matter expertise and considering the crisis that existed The time for the use of ventilators, marry that up with the core competencies at CAE of systems engineering software, the global sourcing that we have And put that all together and produce in an absolute record of time, not only produce them at high rate, but Inventum because there was no ventilators available and there was obviously no parts available. So we went from So you saw an example of what we can do.
So with regard to your question of moving forward, we took a conscious decision Basically say that, well, if we look at the market going forward, yes, we could do that and maybe we could get to Brazil. But I think with the what's happened in the pandemic, a lot of people now produce a lot of ventilators including Yes, typical producers of ventilators across the world, OEMs have produced ventilators and there is a At the moment, I think there's a glut overall. I mean, obviously, there's some shortages in key areas like, for example, tragically in India, for example. But what you're seeing is overall there's going to be a lot more vent layers on a steady state than is actually required. And going forward, Do we really want to be competing against established players producing ventilators and we've selected no.
And what we'd rather do though Again, using our subject matter expertise to partner with those companies in producing simulation based training associated with that And really that we think is a much better way forward.
I appreciate the color there and kudos on opening up the vaccination
The next question comes from Benoit Poirier of Desjardins. Please go ahead.
Yes. Good afternoon, everyone. Just for defense, when we look at the adjusted operating margin reached 2% or 6.9% with government subsidies, which is down from almost 12% a year ago, while Revenue were only down 2%. So could you maybe provide some color on what drove the decline and how Should we expect defense margins to recover from these levels?
Well, I think the first number just the same as we talked about with the margins similar to 17.2% and so I think use the higher number, that's number you should be looking at because again for the reasons that we talked about the costs That are being offset by the government program. So, we talked about before those issues, they haven't changed really, but it's been a while. The fact is, If you look at the fact that our book to bill has been below 1 for the last 5 quarters And which has changed this quarter by the way in a quite nice way and I expect that to continue. So, you take the lack of orders, particularly product orders Because they tend to be higher margin, number 1. And the fact is, you're eating off your margins.
So as you eat As you eat off your backlog, you still have a lot of costs. So those are in the end of the day, you have to be absorbed. That's number 1. The other thing is, Yes, our mix has changed over the past few years to more service contracts. They tend to be lower margin.
We have had a Host of COVID related issues in defense, particularly internationally, U. S. Has been less affected, but having said that it has been affected and I'll just give you an example, a quarter before is like our Tampa Train Center, which is the train C-one hundred and thirty crews, A large part of the customers that come to that Tampa Training Center are overseas customers and because of that, that tends to be A higher margin operation for that reason, but the customers haven't been able to show up because they haven't been able to travel. So that's been quite a bit of a headwind all year. But internationally, what's happened is, we've really had the issues in regards to Basically access to customers, access to facilities due to lockdowns overall.
So all of those factors explain where we're at. Going forward, I mean, the COVID related issues themselves Are abating, we still have some like with access to customers in the Middle East for example is still difficult. So programs are still difficult and we are Basically executed those programs as we speak. But again, I'm very encouraged by a couple of things. Number 1 is the orders that we're signing, The volume of those orders that we're signing, we're getting back on the positive.
The fact that again, what I should have said at the outset is And as mentioned in my remarks, we have about $800,000,000 of orders that we expected to sign in the past year and going into this year They've literally been pushed right, because we've had literally these they've been delayed largely due to COVID, Because although defense forces themselves, there is obviously the sense of service they've kept operational, but large cases that people that would support Putting orders, contracts in place just haven't been there or certainly non force and that's caused the delays. That's going to catch up over the next few quarters. At the same time, we've used the opportunity during this COVID crisis to make the investments Broadly as a company to make sure that we come out of this as a COVID winter that includes operational efficiencies in defense. Some of that is captured in a restructuring service, the restructuring that you see. So that part of that $65,000,000 to 70,000,000 Will be reflected in the defense.
So, I guess long answer to show that margins should be going up And I fully expect us to get north of the north or at least in the low double digits before too long.
Okay. But of course, it's really great call. And of
course, everything gets increased once we do the L3 acquisition, L3 Harris acquisition, Because on a typical basis, they were operating at a higher margin than we are with a concentration of more products Services and a much stickier kind of backlog Because the focus they have, so that will improve things as well.
Yes. And with respect to defense, how much visibility do you have for fiscal 'twenty two, which I mean, what is already in the backlog to meet your growth ambition? And following L3, what would be the breakdown between equipment and Services in terms of mix for defense?
Well, I think we haven't provided much So visibility on what we see this year for good reason, because we don't well, it's not that we don't have visibility of our existing programs in But it's really in terms of the when we expect the closing of the L3 Harris acquisition will occur. I think I would point to the fact that the book to bill this quarter of 1.1. I think that basically starts to tell you that We're getting good coverage of order intake the revenue to what we really need. So in terms of well, actually in fact, when I looked at the numbers, we actually have going into the year, The highest percentage backlog, the percentage of revenue to fulfill the year, we have the highest percent of In our backlog already than I've seen in recent history, if you know what I mean, the coverage. Yes.
Okay. That's great. Yes. Thank you very much.
Thank you.
The next question comes from Ron Epstein, Bank of America Merrill Lynch. Please go ahead.
Yes. Hey, good afternoon, Maybe changing gears just a little bit here. There's been a lot of focus lately on urban air mobility And the market has been supportive of many of the different companies developing these vehicles. But maybe one of the long tent poles is who are going to fly these things? So my question to you is, have you been approached at or are you in conversations with any of the urban air mobility companies or The companies that want to operate those vehicles on a strategy around training pilots, at least for the time period before those things go autonomous, which Might be quite some time.
Absolutely, absolutely. I personally believe that this is going to be Definitely a good part of the market in the future. Your guess at the when that happens is as good as mine, but I certainly believe there is some estimates that are out there that's probably in terms of pilots probably needing about In the nature of our SNS 60,000 pilots by 2,030, for us, we're very much involved in that Space, I can tell you they have these specialized meetings of everybody who's in the industry, including all of these Companies that are producing these various eVTOL devices. I was at the last one, which is just prior to COVID that was in Dallas. It So I can tell you I was visiting myself just last week with one Very strong competitor, a contender, Beta Aviation.
I was with their CEO and their team in Burlington, Vermont just last week and Very impressed with what they're doing. We're partnering with them on going forward and just we announced that we're doing this with Jaunt as I mentioned in my remarks. Other I won't go through all of them because some of them are competitively sensitive. They don't want us to talk about it, but you well, I think you can rest assured that we're involved with pretty much the whole ecosystem right now. As usual, we would take our role That we want to be if you like OEM agnostic.
So, we want to be able to serve the industry. We serve them not only in training pilots, but also help them The initial design and certification of the aircraft which we're doing as I mentioned the contract that we signed with John is For helping them do, if you like to call it in the industry parlance, the Iron Bird with software in loop. So basically where you can fly the vehicle using software Way before you ever fly the real aircraft and you prove out all the software interfaces and you can actually certify Components of the design using while flying it if you like virtually. So again, we're very much part of that Because I think it's going to be part of the future. It's an exciting part.
I can tell you that being an aviation geek my whole life, I mean, This is where aviation was in the 30s where you have a whole bunch of people developing aircraft. It's like the Wild West out there. It's quite exciting, but we'll be part of it.
Great. Thank you.
Thank you, operator. I think that's all the time that we have today for investors. Before we open the lines to the media, Mark will say a few words in French. So, Mark,
The first question comes from Andre Alorre of Les Alves Quebec. Please go ahead.
Operator, I think that's all the time we had for this afternoon. I know we went a bit Longer than we usually do, but a big quarter and certainly lots of great questions. I want to thank all participants from the investment community and members of the media. And I would remind participants that a transcript of today's call can be found on Sea's website as well as a link to the replay. Thank you very much.
Thank you. This does conclude the conference conference today. We thank you for your participation and ask that you please disconnect your lines. Thank you and have a good day.