Mr. Marc Parent reports

CAE REPORTS SECOND QUARTER FISCAL 2024 RESULTS

CAE Inc. had revenue of $1,088.5-million for the second quarter of fiscal 2024, compared with $993.2-million in the second quarter last year. Second quarter EPS (earnings per share) was 18 cents compared with 14 cents last year. Adjusted EPS in the second quarter was 27 cents compared with 19 cents last year.

Operating income this quarter was $100.6-million (9.2 per cent of revenue) compared with $102.1-million (10.3 per cent of revenue) last year. Second quarter adjusted segment operating income was $138.5-million (12.7 per cent of revenue) compared with $124.7-million (12.6 per cent of revenue) last year. All financial information is in Canadian dollars unless otherwise indicated.

"We delivered a good performance overall in the second quarter, with double-digit top- and bottom-line growth, driven mainly by strong momentum in civil and a higher contribution from defence compared to last year. We also further bolstered our financial position on the path to meeting our short-term leverage target," said Marc Parent, CAE's president and chief executive officer. "We made excellent progress in the quarter to secure CAE's future with nearly $1.2-billion in total adjusted order intake, for a record $11.8-billion adjusted backlog. Orders in civil included 15 full-flight simulators, long-term training agreements, and contracts for our next-gen crew management and aircraft operations solutions. In defence, we continued to build our backlog with orders exceeding revenue in the quarter for simulation-based training solutions and support services. Following the end of the quarter, we announced a definitive agreement to sell Healthcare for an enterprise value of $311-million, a decision which better positions CAE to efficiently allocate capital and resources to secure growth opportunities in our large core simulation and training markets. We are proud of CAE Healthcare's significant contribution to patient safety and expect this to continue. Healthcare will be well positioned to support future growth under its excellent leadership and new ownership, focused on evolving simulation to drive patient safety and quality outcomes. As we look to the period ahead, we now expect civil growth this fiscal year in the mid- to high-teens percentage range of adjusted segment operating income growth. The higher expected growth is based on our strong performance across all regions year to date, including Asia, which had been lagging in the global air travel recovery. We also have good demand visibility given the regulated nature of aviation training. We expect civil performance to be weighted more to the fourth quarter, based on planned simulator deliveries and training seasonality. In defence, we will continue to transform our business by replenishing our backlog with more profitable programs and by retiring legacy contracts, which have been most affected by inflationary pressures. U.S. budget appropriation uncertainty is causing delays to our expected ramp-up of new programs in backlog and to awards expected from our pipeline. As such, we currently expect defence second-half adjusted segment operating income margins to remain in the mid-single-digit percentage range. The anticipated positive inflection in defence performance is expected to occur during the next fiscal year, but will ultimately depend on the duration and magnitude of delays to new programs in the current environment. We are firmly focused on retiring legacy contracts as soon as possible and to mitigating the cost pressures associated with them. We remain very pleased with the accretive margin profile on our newly awarded work, which continues to underlie our conviction in our low-double-digit margin target at steady state. We continue to be highly encouraged by the secular tailwinds in all segments and the growth we expect by harnessing our global market and technology leadership, and the power of One CAE."

Civil aviation

Second quarter civil revenue was $572.6-million versus $507.2-million in the second quarter last year. Operating income was $88.4-million (15.4 per cent of revenue) compared with $88.4-million (17.4 per cent of revenue) in the same quarter last year. Adjusted segment operating income was $114.3-million (20 per cent of revenue) compared with $104.4-million (20.6 per cent of revenue) in the second quarter last year. During the quarter, civil delivered 11 full-flight simulators (FFSs) to customers and second quarter civil training centre utilization was 71 per cent.

During the quarter, civil signed training solutions contracts valued at $617.8-million, including a range of long-term commercial and business aviation training agreements and 15 FFS sales. Civil FFS orders total 37 for the first half of the fiscal year.

Notable civil contract awards for the quarter included 15 FFS sales, including a multiyear purchase of six Boeing B737 Max simulators and two previous B737 Max simulator options converted to firm orders for Ryanair and two Airbus A320 simulators for United Airlines. In commercial aviation civil signed a multiyear aviation training agreement with Delta Airlines, and in business aviation, it signed a two-year training agreement with Windrose Air Jetcharter GmbH. In flight operations solutions, civil signed long-term, next-generation crew management and flight operations solutions agreements with Wizz Air and Air India.

The civil book-to-sales ratio was 1.08 times for the quarter and 1.27 times for the last 12 months. The civil adjusted backlog at the end of the quarter was a record $5.9-billion.

Defence and security

Second quarter defence revenue was $477.4-million versus $442.4-million in the second quarter last year. Operating income was $9.3-million (1.9 per cent of revenue) compared with $12.1-million (2.7 per cent of revenue) in the same quarter last year. Adjusted segment operating income was $21.3-million (4.5 per cent of revenue) compared with $18.4-million (4.2 per cent of revenue) in the second quarter last year.

Defence booked orders for $527.3-million and an additional $155.5-million of unfunded contracts this quarter.

Notable defence contract awards include a contract for simulation-based training for the U.S. Army's key next-generation airborne intelligence, surveillance and reconnaissance (ISR) system, the High Accuracy Detection and Exploitation System (HADES), which is based on the Bombardier Global 6000/6500 business jet. It is also now under contract with Bell Textron to support the U.S. Army Future Long Range Assault Aircraft program. As part of a teaming arrangement with Bell for its Future Vertical Lift family of systems, CAE is expected to provide maintenance training devices, assist in the development of flight training devices and deliver other training products. It also received an order to provide the U.S. Army with support services for the Advanced Helicopter Flight Training Support Services for aircrew and non-aircrew personnel. Defence was awarded contracts for the modification and maintenance of F-16 training devices for the U.S. Air Force, as well as for the upgrade of various training devices.

The defence book-to-sales ratio was 1.10 times for the quarter and 0.93 times for the last 12 months (excluding unfinanced backlog totalling $155.5-million). The defence adjusted backlog, including unfunded contract awards and CAE's interest in joint ventures, at the end of the quarter was a record $5.9-billion. The defence pipeline remains strong with approximately $9.5-billion of bids and proposals pending.

Health care

Second quarter health care revenue was $38.5-million versus $43.6-million in the second quarter last year. Operating income was $2.9-million (7.5 per cent of revenue) compared with $1.6-million (3.7 per cent of revenue) in the same quarter last year. Adjusted segment operating income was $2.9-million (7.5 per cent of revenue) compared with $1.9-million (4.4 per cent of revenue) in the second quarter last year.

Subsequent to the end of the quarter, CAE announced a definitive agreement to sell its health care business to Madison Industries for an enterprise value of $311-million, subject to customary adjustments. This transaction better positions CAE to efficiently allocate capital and resources to secure growth opportunities on the horizon in its much larger, core simulation and training markets. Closing of the transaction, which is subject to closing conditions, including customary regulatory approvals, is expected before the end of fiscal year 2024. Sale proceeds will be principally used to accelerate deleveraging, as well as to support CAE's continued focus on technology advancement, market leadership and cost optimization within its core training and simulation markets.

Additional financial highlights

CAE incurred restructuring, integration and acquisition costs of $37.9-million during the second quarter of fiscal 2024 relating mainly to the acquisitions of Sabre's AirCentre airline operations portfolio and L3Harris Technologies' military training business.

Net cash provided by operating activities was $180.2-million for the quarter, compared with $138-million in the second quarter last year. Free cash flow was $147.5-million for the quarter compared with $108.4-million in the second quarter last year. The increase was mainly due to a higher contribution from non-cash working capital, partially offset by lower cash provided by operating activities.

Income tax recovery this quarter amounted to $8.5-million, representing an effective tax rate of negative 16 per cent, compared with an effective tax rate of 24 per cent for the second quarter last year. The adjusted effective tax rate, which is the income tax rate used to determine adjusted net income and adjusted EPS, was nil this quarter as compared with 24 per cent in the second quarter of last year. The decrease in the adjusted effective tax rate was mainly attributable to the recognition of previously unrecognized deferred tax assets, which had an approximate five-cent positive EPS impact this quarter.

Growth and maintenance capital expenditures totalled $61.9-million this quarter.

Net debt at the end of the quarter was $3,184.5-million for a net debt-to-adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) of 3.16 times. This compares with net debt of $3,166.4-million and a net debt-to-adjusted EBITDA of 3.22 times at the end of the preceding quarter.

Net finance expense this quarter amounted to $48-million compared with $54.1-million in the preceding quarter and $41.3-million in the second quarter last year.

Adjusted return on capital employed was 7 per cent this quarter compared with 6.6 per cent last quarter and 5.1 per cent in the second quarter last year.

Environmental, social and governance (ESG)

During the quarter, CAE completed its first Ecovadis assessment. Ecovadis is one of the leading business sustainability rating providers, used by leading aerospace and defence original equipment manufacturers, and focuses on assessing the depth and breadth of sustainability integration into a business's processes and supply chain. This rating will strengthen CAE's position to pursue future business opportunities and is further testament to the maturity of its sustainability commitment and role as a sustainability leader in its industry. CAE also proudly launched its Crystal Excellence Award supplier recognition program. This initiative acknowledged four deserving supplier laureates that exemplify operational excellence and commitment to supporting CAE on its decarbonization journey. In addition, CAE released its very first gender equality report, showing its dedication to fostering diversity and inclusivity within its organization and beyond. Finally, CAE raised approximately $1.3-million in its 2023 CAE-Centraide (United Way) fundraising campaign through employee donations, fundraising activities and a corporate donation, in collaboration with Unifor. CAE and its employees are extremely proud to be an integral part of the fabric of Greater Montreal.

Management outlook updated

CAE is pursuing a growth strategy to become a bigger, stronger and more profitable company. Through accretive growth capital deployments and strong execution, its civil segment, the largest within CAE, continues to experience strong growth momentum. Management continues to target a three-year (fiscal year 2022 to fiscal year 2025) EPS compound growth rate in the mid-20-per-cent range and expects this to be driven by the continuing strong civil performance and the multiyear transformation under way in defence. The realization of CAE's strategic growth objectives is expected to result in a significantly larger base of business and a capital structure that affords flexibility to balance further investments in its future alongside capital returns for shareholders.

Management has a highly positive view of its growth potential over a multiyear period, underpinned by favourable secular trends across business segments. Greater desire by airlines to entrust CAE with their critical training and digital operational support and crew management needs, and higher expected pilot training demand in commercial and business aviation are enduring positives for the civil business. Management believes the defence sector is in the early stages of an extended upcycle, driven by an increased focus on near-peer threats, greater commitments by governments to defence modernization and readiness in context of geopolitical events, and a need for the kinds of digital immersion-based synthetic solutions that draw from CAE's expertise in commercial aviation simulation and training.

The company expects civil to continue growing at an above-market rate, driven by growth and recovery in air travel, increased penetration of the existing addressable market for training and flight services solutions, and a sustained high level of demand for pilots and pilot training across all segments of civil aviation. In fiscal 2024, management previously indicated an expectation for low- to mid-teen percentage annual growth in civil adjusted segment operating income. Management now expects even higher growth this year in the mid- to high-teens percentage range. Civil's expected annual adjusted segment operating income margin percentage continues to be in the range of fiscal 2023, as a function of a mix of higher training and customer FFS delivery volumes and the continuing simulator deployments and expansions of CAE's global training network. CAE's civil business is experiencing a more pronounced seasonal pattern in fiscal 2024, with performance weighted to the second half of the year, and mostly to the fourth quarter. In addition to continuing to grow its share of the aviation training market and expanding its position in digital flight services, civil expects to maintain its leading share of FFS sales and to deliver approximately 50 FFSs for the year to customers worldwide, approximately half of which are slated for the fourth quarter.

CAE's defence segment is in the process of a multiyear transformation, which is expected to yield a substantially bigger and more profitable business. Defense has already become the world's leading pure-play, platform-independent, training and simulation business, providing solutions across all five domains. It is uniquely positioned to draw on CAE's industry-leading training solutions in commercial aviation, and to revolutionize training with the application of advanced analytics and leading-edge technologies. This is expected to bring increased potential to capture business around the world, accelerated by an expanded capability and customer set. Defence's recent strategic program wins, record $5.9-billion adjusted backlog, and $9.5-billion pipeline of bids and proposals outstanding demonstrate that its transformation strategy is bearing fruit. Over the long term, CAE continues to expect superior defence growth to be driven by the translation of its bid activity into higher-margin order intake and execution of contracts with sustainably higher profits.

In fiscal 2024, defence expects to continue replenishing its backlog with larger and more profitable programs, ramp up recently awarded contracts, and make progress concluding its lower-margin legacy contracts. Inflationary pressures on legacy contracts, while finite, remain the most significant factor contributing to the current suboptimal margin performance of the business. In addition, the prevailing U.S. government budget appropriation uncertainty is delaying the ramp-up of certain newer and higher-margin defence programs in backlog and the conversion of bid pipeline to orders previously expected in the fiscal year. The cost headwinds on remaining legacy contracts, in combination with program financing and award delays, are impacting the timing of the anticipated positive inflection in defence margins. Management now expects second-half defence adjusted segment operating income margins to remain in the mid-single-digit percentage range. The anticipated positive inflection in defence performance is expected to occur during the next fiscal year, but will ultimately depend on the duration and magnitude of delays to new programs in the current environment. Management continues to be highly focused on execution and the retirement of legacy programs and mitigating the finite cost pressures associated with them. Although it will require some additional time to reach a positive inflection in defence performance, the trendlines are moving in the right direction and the necessary factors exist to support management's targeted low-double-digit percentage steady-state margins in defence.

Total capital expenditures in fiscal 2024 are expected to be approximately $50-million higher than last fiscal year, mainly in support of a higher amount of market-led, accretive organic investments involving civil aviation training network expansion, simulator deployments and customer training outsourcings. The company usually sees a higher investment in non-cash working capital accounts in the first half of the fiscal year, and as in previous years, management expects a portion of the non-cash working capital investment to reverse in the second half. The company continues to target a 100-per-cent conversion of adjusted net income to free cash flow for the year. The company expects to apply a significant portion of the net proceeds from the sale of its health care division to reduce debt. The transaction is expected to close before the end of the current fiscal year, subject to closing conditions, including customary regulatory approvals. Management remains focused on making organic investments in lockstep with customer demand, integrating and ramping up recent investments, and continuing to deleverage its balance sheet. With leverage having decreased to a waypoint ratio of approximately three times net debt to adjusted EBITDA, CAE is now considering reinstating capital returns to shareholders, following the closing of its health care sale transaction. Management will continue to prioritize a balanced approach to capital allocation, including financing accretive growth, further strengthening its financial position and returning capital to shareholders. CAE expects its average adjusted effective income tax rate for the remainder of the fiscal year to be approximately 22 per cent.

Detailed information

Readers are strongly advised to view a more detailed discussion of CAE's results by segment in the management's discussion and analysis and CAE's consolidated financial statements for the quarter ended Sept. 30, 2023, which are available on its website, SEDAR+ and EDGAR. Holders of CAE's securities may also request a printed copy of the company's consolidated financial statements and MD&A free of charge by contacting investor relations (investor.relations@cae.com).

Conference call Q2 FY 2024

Mr. Parent, CAE president and CEO; Sonya Branco, executive vice-president, finance, and chief financial officer; and Andrew Arnovitz, senior vice-president, investor relations and enterprise risk management, will conduct an earnings conference call today at 2 p.m. ET. The call is intended for analysts, institutional investors and the media. Participants can listen to the conference by dialling 1-877-586-3392 or 1-416-981-9024. The conference call will also be audio webcast live on CAE's website.

About CAE Inc.

CAE equips people in critical roles with the expertise and solutions to create a safer world. As a technology company, CAE digitalizes the physical world, deploying software-based simulation training and critical operations support solutions. Above all else, the company empowers pilots, cabin crew, airlines, defence and security forces, and health care practitioners to perform at their best every day and when the stakes are the highest. Around the globe, CAE is everywhere customers need it to be with more than 13,000 employees in approximately 250 sites and training locations in over 40 countries. CAE represents more than 75 years of industry firsts -- the highest-fidelity flight, mission and medical simulators and training programs powered by digital technologies. CAE embeds sustainability in everything it does. Today and tomorrow, CAE will make sure its customers are ready for the moments that matter.

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