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CAE Inc
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Good day, ladies and gentlemen, and welcome to the CAE first 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. You may now proceed, Mr. Arnovitz.
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 '21 and answers to questions contain forward-looking statements. These forward-looking statements represent our expectations as of today, August 12, 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 risk factors and assumptions that may affect future results is contained in CAE's annual MD&A. Available on our corporate website and in our filings with the Canadian Securities Administrators on SEDAR and the U.S. Securities and Exchange Commission on EDGAR.On the call with me this afternoon are Marc Parent, CAE's President and Chief Executive Officer; and Sonya Branco, our Chief Financial Officer. After remarks from Marc and Sonya, we'll take questions from financial analysts and institutional investors. Following the conclusion of that Q&A period, we'll open the call to questions from members of the media.Let me now turn the call over to Marc.
Thank you, Andrew, and good afternoon to everyone joining us on the call. I'll first discuss some of the highlights of the quarter, and then Sonya will review the detailed financials. I'll come back at the end to talk about our outlook.Much has been said over the last 5 months about the COVID-19 pandemic, and the profound ways have changed our daily lives, both personally and professionally. And the word unprecedented has since become synonymous with the crisis. No doubt, the rapid onset and pervasiveness of the economic and social impacts of the pandemic are like nothing we've ever seen before. The impact on our employees and customers has certainly presented us with some very significant challenges.It's in the toughest moments, however, that we're truly put to the test. And throughout all of this, I continue to be very proud of the responsiveness of CAE and its employees, who've been adapting rapidly to this new reality by embracing new challenges, mitigating risks and innovating new ways to best serve our customers as their partner of choice.As we came to expect in early March this year, the full brunt of the pandemic would indeed hit us hard during our first quarter, manifested by sharply lower demand and major disruptions to our global operations. Right at the start, we acted quickly to ensure the health and safety of our employees and customers by taking extensive measures, and we safeguarded the company's financial position and liquidity. CAE has shown considerable agility and resiliency amid the most challenging conditions our company has ever faced.In the first quarter, we managed to significantly mitigate our inevitable operating loss position to near breakeven on a normalized basis. We also improved our free cash flow performance compared to last year. And critically, we maintain our resiliency with a solid financial basis.Despite the challenging environment, we booked $417 million of orders in the quarter for a 0.76 book-to-sales ratio. And we ended the quarter with a solid $8.6 billion backlog.Looking specifically at Civil, despite the major operational hurdles presented by mandatory temporary facility closures, including our training centers and main manufacturing site and extensive travel restrictions, we managed to deliver 2 full flight simulators to airline customers in the quarter, and we averaged 33% utilization of our training network. With more than half of our global training network, either closed temporarily or at reduced operations, utilization reached a low point around the 20% range during the quarter. Since then, we've seen average training center utilization rise to upwards of 40% as our facilities reopen and flight crews resumed some of their critical training activities.We also continued to book orders with Civil signing training solutions contracts valued at $194 million, including a contract for Airbus A320 full-flight simulator to China Express, a 4-year training agreement with Alitalia, a 5-year training agreement with WAMOS Air, another 5-year trading agreement with long-term business aviation partner, SC Aviation and a 2-year business aviation training agreement with Air Hamburg. On the OEM front, we also concluded 5-year training agreement with Boeing to support Boeing's ab initio Pilot Development Program.We've been adapting quickly to new realities by introducing new virtual service offerings to support our customers as a response to border restrictions, including remote support for the installation, acceptance and qualification of the simulators. We also recently obtained FAA and other civil aviation authority approvals for virtual training in certain of our flight training organizations, and we developed remote and structured operating station solutions for live and structure interactions during training sessions.As a product of our ongoing digital innovation initiatives, we launched instructor-led online courses for aviation maintenance training. And CAE airsight, a new digital community platform that provides training and career resources to pilots, which I would encourage you to visit at airsight.de.In Defence and Healthcare, the pandemic has also caused significant disruption, which have hampered customer demand and our ability to deliver our products and services. Notwithstanding the challenging environment, Defence booked orders for $201 million, including contracts that provide a United States Air Force with upgrades and enhancements to both the KC-135 and C-130H aircrew training system program and to continue providing a range of in-service support solutions for the Royal Canadian Air Force's CF-18 aircraft.Other notable contracts, including providing Airbus Defense and Space supports for the development of new and upgraded training capabilities for Germany's Eurofighter program. We also received an order to continue providing maintenance and support services for the Royal Navy's Merlin helicopter training system.And in Healthcare, we put our full weight into designing, developing and bringing to market the CAE Air1 ventilator. We didn't have any deliveries from this new product line in the quarter, but we did incur some start-up expenses, and we're only going to see deliveries really ramp up from the 10,000 units ordered by the government of Canada in the second half of the fiscal year.In response to the urgent needs of our customers, we've provided complementary training seminars on how to prepare health care workers in the fight COVID-19. We also launched simulation-based training solutions, both web and hardware-based to train personnel in the safe practice of ventilation and incubation, which is key to saving lives and released the COVID-19 Ultrasound training suite to provide hands-on foundational training for physicians. Additionally, as institutions begin to reopen and offer remote education, we provided new tools and training on how to implement distance learning with their solutions such as the distance learning for nursing course.With that, I'll now turn the call over to Sonya, who will provide a detailed look at our financial performance. And I'll return at the end of the call to comment on our outlook. Sonya?
Thank you, Marc, and good afternoon, everyone. It was indeed an extremely challenging quarter. But with all the measures that we put in place in early April to safeguard our financial position and to ensure liquidity by reducing costs and preserving cash, we helped narrow the pandemic's operational impact, and we maintained our resiliency with a solid financial base.Our net debt position at the end of the quarter was $2.4 billion for a net debt-to-capital ratio of 50.7%. All things considered, I am pleased this remains stable with our net debt position of $2.4 billion or 47.8% of total capital at the end of last year. And on an adjusted net debt-to-EBITDA basis, we ended the quarter with a ratio of 3.04x, which is up 40 basis points compared to the end of the last fiscal year. Bolstering our financial resources during the quarter, we concluded a new 2-year $500 million senior unsecured revolving credit facility and expanded our receivables purchase program by USD 100 million. These transactions provided us with access to additional liquidity and further strengthens our financial position. All told, between cash and available credit, we continue to have upwards of $2 billion of liquidity, which we believe, in addition to the cash we expect to generate from operations, is enough to manage through the period ahead.The market situation has evolved rapidly. And reflecting the current impact on our business and the time anticipated for recovery in our end markets, we recorded nonoperational costs of $108.2 million during the first quarter of fiscal 2021, relating mainly to impairment charges on property, plant and equipment, intangible assets of certain financial assets as a result of the continued negative impact of COVID-19 pandemic.And since the end of the quarter, we announced that we are taking additional measures 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 lower level of demand for certain of our products and services. These measures include the introduction and acceleration of new digitally enhanced processes such as remote installations and certifications and work-from-home practices. As a result, we expect to record restructuring expenses of approximately $100 million over the next 12 months.Consisting mainly of real estate costs, asset relocation and other direct costs related to the optimization of our footprint and employee termination benefits. Actions will include the consolidation of some of our facilities where overlap currently exists so that we gain the efficiencies of operating from larger centers, and we will also be relocating several training assets to optimize utilization.Real estate and asset optimization costs are expected to account for approximately 70% of the total restructuring expense. Taken together, these measures are expected to enable CAE to emerge from the current period from a position of strength. And we expect to fully realize cost reductions of approximately $50 million annually, starting in our fiscal year 2022.Now turning to our operational performance and other highlights in the quarter. Consolidated revenue was $550.5 million, down 33% compared to $825.6 million in the first quarter last year. And segment operating loss before specific items was $2.1 million compared to a segment operating income of $113.3 million last year.Considering the extreme severity of the pandemic impact on our ability to operate in the first quarter, a near breakeven operating performance is a true testament to the resiliency of CAE's business model. Quarterly net loss before specific items was $30.3 million or negative $0.11 per share, which compares to $0.24 that we reported in the first quarter last year.Also of note, we received approximately $56 million in gross government's wage subsidies from several of our global jurisdictions during the quarter, of which approximately $44 million was credited to income. Substantially all of this amount either flowed directly to employees according to the way the subsidy programs were designed in certain countries or the amounts were offset by the increased costs we incurred in bringing back some 2,500 employees who were previously placed on furlough or reduced workweeks.I would underscore that we brought back these employees at the same time as implementing our cost savings measures, and in essence, the wage subsidies were applied as intended as a substitute for initial cost savings measures taken and to alleviate some of the impact on affected employees.Now looking at cash flow. Cash from operating activities before changes in noncash working capital was positive $36.9 million for the quarter compared to $137.8 million in the first quarter last year. Free cash flow was negative $92.7 million in the quarter, which is an improvement over the negative $102.1 million free cash flow results last year. The increase results mainly from a lower investment in noncash working capital, lower dividends paid and lower maintenance capital expenditures, partially offset by a decrease in cash provided by operating activities. We continue to expect free cash flow to be negative for the first half of the fiscal year, resulting from the acute impacts of the pandemic on demand and operations and seasonally higher level of investment in noncash working capital accounts. We also continue to expect to generate positive free cash flow in the second half of the fiscal year.Return on capital employed before specific items was 8% this quarter compared to 10.7% last quarter and 11.9% last year. Income tax recovery this quarter was $35.4 million, representing an effective tax rate of 24% compared to 17% for the first quarter last year.The tax rate was higher due to the impact of impairment charges, partially offset by the change in the mix of income from various jurisdictions. Excluding the effect of the impairments, the income tax rate would have been 20% this quarter.Now looking at our segmented performance. In Civil, first quarter revenue was down 48% year-over-year to $248 million as a result of the significantly lower-than-usual training utilization and the suspension of manufacturing and disruption of installations on deliveries of simulators' products to our customers worldwide through the government-mandated travel bans, border restrictions, lockdown protocols and self-isolation measures. Civil's operating loss before specific items was $16.2 million. On the other front, Civil's book-to-sales ratio for the quarter was 0.78x, and for trailing 12-month period, it was 1.02x.In Defence, first quarter revenue of $280.2 million was down 13% over Q1 last year as the COVID pandemic continued to contribute to delays in the execution of programs from backlog and in order intake. While operating income from specific items was up 15% to $17.3 million for an operating margin of 6.2%. Defence book-to-sales ratio was higher this quarter at 0.72x, and it was 0.94x for the last 12 months.Lastly, in Healthcare, the first quarter revenue was $22.3 million, down 19% from $27.5 million in Q1 of last year. Segment operating loss was $3.2 million compared to a loss of $2.8 million in Q1 last year. About half of the operating loss is attributed to the start-up cost for our new ventilator contract, which have not contributed yet to revenue in the quarter.With that, I will ask Marc to discuss the way forward.
Thanks, Sonya. At the outset of the pandemic, we faced 2 essential questions as it relates to our business. How long will the crisis last? And how bad would it get?With the benefit of some perspective over the last 5 months, the positive news is that we believe the worst of the pandemic impact on CAE may now indeed be behind us. However, the pace of recovery is unlikely to be linear or quick. And it will most certainly be dictated by the progression of the pandemic and the rate at which travel restrictions and quarantines can safely be lifted and economic activity improves.Global air transportation and air passenger travel were especially hard hit with IATA currently forecasting commercial passenger traffic to be down 50% to 60% this year and a recovery that could take 3 years before getting back to pre-COVID levels.We continue to view the current fiscal year as a tale of 2 halves, with the first half of the new year, marked by lower demand and disruptions and the second half to potentially begin to inflect more positively. The timing of market's recovery remains unclear. But we're confident in the long-term fundamentals of the market we serve, and we know this too shall pass.Looking ahead, we're planning CAE's future from a position of resilience and strength. We've had global leading market positions, recurring revenue streams, attractive end markets in the Civil, Defence and Healthcare as well as a solid financial position.In civil, as the global fleet eventually resumes service, we expect to continue building on our previously positive momentum, increasing market share and securing new customer partnerships with our innovative training and operational solutions. We're currently in advanced discussions with a number of airline customers to potentially do more for them.I believe the current context will lead to more airline training outsourcing opportunities as the industry looks for ways to gain greater agility and resiliency in the post-COVID-19 era.In Business Aviation, which represents a substantial part of our Civil business, demand is driven largely from addressing the regulated training needs of the already-active global business aircraft fleet and the delivery of large cabin businesses.From this perspective, we continue to believe this segment of the market will fare better than commercial in the downturn. It will also likely recover faster. Demand for Civil full flight simulators is closely linked to new aircraft deliveries. And while the total market for simulators expect to be substantially smaller this fiscal year, we expect to maintain our leading share of the available full flight simulator sales.We have the benefit of a large backlog of customer-funded full flight simulator orders, though. And several full flight simulator deliveries from backlog should indeed be delayed, but the risk of cancellation remains low, and we expect to substantially deliver this backlog over the next couple of years.In Defence, we also benefit from a large backlog of contracts with government customers to provide training solutions and mission support services that are considered essential to national security. This week, we announced that Dan Gelston will become CAE's new group President, Defence and Security, transitioning from Heidi Wood, CAE's EVP, Business Development and Growth Initiatives, who currently serves as Interim Group President.Dan brings a wealth of experience as a proven leader with more than 20 years of experience in the U.S. military, intelligence community and the global defense industry and will be joining us on August 24 and based out of our Washington, D.C. office.In the current fiscal year, COVID-19-related issues are slowing Defence's progress towards program milestones on work in backlog, including for some of our more complex programs. The pandemic has also led to delays in contracts awards globally. And the structural effects of low oil prices has further impacted the rate of expected contract award in the Middle East.More recently, the acceleration of new COVID cases in the United States has impacted our ability to deliver training services from certain of our sites. Although Defence continues to be hampered by COVID-19 in fiscal year '21, the long-term outlook for Defence continues to be for growth, supported by a large addressable market for our innovative solutions and the realization of the benefits of our new leadership.Despite the near-term headwinds, we're maintaining our leading position as a training and mission support partner, thanks to our leading-edge capabilities and translating a physical world into the synthetic world. We're expanding beyond training to become a leader in digital immersion.And with our expertise in the integration of live, virtual and constructive training, we believe that we'll make attractive inroads into that market in the years ahead. And in Healthcare, our purpose, mission and passion is to make health care safer. We believe the significant changes brought about by this pandemic will result in a bigger role for e-learning and healthcare simulation and training.Looking forward, the secular shift ahead appear promising. We continue to believe CAE's Healthcare is well positioned to capitalize on this change and the appreciation of the benefits of healthcare simulation and training to improve safety and to help save life, not only during a health care crisis but also during more normal times. And with its innovative products and demonstrated agility, CAE Healthcare will be -- our expectation is CAE Healthcare will become a more material part of the company over the longer term.We have a deeply rooted culture of innovation and a proven ability to adapt quickly to dynamic market conditions. The CAE Air1 ventilator, we just developed in Healthcare is a testament to seize agility and innovation. We rapidly applied the full gamut of our technical capabilities in response to the crisis and now are fielding new opportunities globally and the design, manufacture and sale of life-saving ventilators.Tough times require new thinking. And across all of our markets, we've adapted our offerings by introducing new ways to leverage virtual reality and distance learning technologies to serve our customers' critical needs.CAE is a high-technology company, providing solutions at the leading edge of digital immersion. Our extended outlook remains highly compelling with potential for compound growth and superior returns over the long term. CAE employees, our most valuable assets, are imbued with a culture of innovation, empowerment, excellence and integrity, and we expect to emerge from a pandemic even better positioned. Our restructuring program is expected to yield approximately $50 million of annual recurring cost savings, starting in fiscal year 2022 from initiatives, including the introduction and acceleration of new digitally enhanced processes and the optimization of our global asset base and footprint.At the same time, we're keeping up the pace of our investment and focus on technological innovation to reimagine the customers' experience and broaden our aperture to revolutionize training and operational support solutions. As our core end markets recover, the new normal that emerges could present novel challenges for our customers. We believe certain trends will arise in greater force post-COVID-19, such as e-learning, remote work, an even greater imperative on safety and the accelerated digital transformation and virtualization of the physical world.CAE's core capabilities align very well with these future needs, and we fully intend to use the current period to further strengthen our technological expertise and expand the aperture of how and what we bring to market.We're leaning forward to capture more organic growth by leveraging our leading-edge understanding of man to complex machine interfaces, and we continue to assert our leadership in attractive markets with long-term secular tailwinds.Already, we're seeing excellent customer receptivity to our recent new technology development in the area of machine learning-enabled data analytics, remote delivery and virtual reality, augmented reality. And we'll be driving forward to excel on these new fronts now more than ever.To conclude, we're effectively managing the things we control within this unprecedented environment, and we're decisively focused on the future. And I expect we'll be ultimately stronger for it.With that, I thank you for your attention, and we're now ready to answer your questions.
Thank you, Marc. Operator, we'll now want to open the line to financial analysts and institutional investors for questions.
[Operator Instructions] And we'll get our first question on line from Fadi Chamoun with BMO Capital Markets.
Just a couple of questions on the cash flow, maybe, Sonya. So if I look at your cash flow from operation before working capital, you've kind of more than covered your CapEx and development cost this quarter. Can we infer from that, that the Civil aviation segment was also positive before working capital this quarter?
Thanks, Fadi. So I think I'm glad that you highlight this. Though despite the fact that more than half of our training facilities were closed or reduced capacity and Civil manufacturing was closed for more than half the quarter, overall, free cash flow has improved. And as you point out, cash from ops, although much less -- or cash from ops before working capital, although much lower than last year, was still positive. So the business overall, despite the challenges was cash-positive before working capital. And this applies to each of the segments, including our Civil overall and our training networks.So despite living through one of the most challenging quarters in our history, I think it's a great demonstration of the resiliency and the cash-generative model of CAE that our cash from ops was positive in this quarter.Now of course, we invested in noncash working cap, some of that is -- a bit of slowdown in some payments that we're managing through or with some of our airline customers. But a lot of it was still the impact of the usual seasonality that we see. So if you take a look at the working capital accounts, a lot of the investment was on accounts payable side, and that's really a reflection that we see every year of the higher production levels and activities in Q4, which then flows through in the first quarter, but at lesser revenue and, obviously, complete with very much exacerbated in this quarter with the fall on the revenue side.So yes, to your point, overall, see cash from operations before working cap positive, and that's in all segments, including our training business.
Okay. No, it's impressive that you can be cash flow positive before working capital, I guess, in a quarter where utilization are in the low 30%. But do you expect working capital to be kind of neutral, revert back in the 9 months coming? Like how do you, kind of, think about that for the balance of the year?
Yes. And to your point, Fadi, so I think it's impressive. There's resiliency, but also, it reflects a lot of the measures we've put in place on cost containment and levers to preserve cash. And so that all contributed to the positive cash position.In terms of working capital, so the first half usually is -- seasonality will drive some investment and then some reversal in the second half. And especially, I think that will be reinforced with kind of the second half inflection positive on free cash flow.So I expect on the free cash flow side continue to be negative in the first half, positive in the second half, and some of that will also, I expect, come from working capital as well.
Okay. Just one clarification. The cash flow guidance, free cash flow guidance does not include the impact, like the cash impact of the restructuring plan that you announced or was that included? It does include...
Yes. We have in -- yes, it does. So we've incorporated the cash impact of the restructuring. And as I mentioned in my remarks, it will -- we will execute this throughout the next year. And so the cash profiling will follow some of that execution. And so it will -- but it has -- it is incorporated in the free cash flow.
Okay. And based on all of this that you just told me and given expectations that things should get better in the next 6 to 9 months as the business aviation market kind of recovered and the aviation market will recover, I'm thinking H1 plus H2 cash flow, you're saying positive and then -- I mean, it will be negative then positive. We should arrive at some outcome that is generally neutral to positive for the balance of -- like for the year at all?
Well, we have both halves, we will come to an outcome. We haven't provided guidance for the full year, a lot of variables still. But the fact that we haven't guided strongly, either way, negative or positive, kind of infers what you're thinking, yes.
Okay. One other question quickly. I mean, you talked a lot about the digitization of the model and the opportunities that probably come out of crisis like this, is there a way for us to think about how much of the training that is conducted is not necessarily need to be conducted at the center -- at the training center itself like you don't need a simulator to do it. It's a classroom kind of training. How much of that, kind of, training happens to be in a classroom that could potentially move into an online model in a permanent way going forward and maybe optimize this whole training solution further as we go in the next few years?
I'll take that, Fadi. I think that we don't have a number for it. But if you think of initial course, for example, on to fly an aircraft, typically, you might spend -- if you look for your business aircraft, you take -- may take 3, 4 weeks of the trading center. And you're doing probably the equivalent of 2.5 weeks of that sitting in a classroom, but that's just ballpark, okay? It depends by aircraft. The rest, you're doing 7, 8 rides in a simulator.So I mean, that can give you some idea. But when we talk about the restructuring savings that we have and achieving permanent cost reductions going forward, the $50 million we talked about. Some of that is basically taking advantage of some of what you just talked about. We've learned to do a few things virtually during the pandemic. And at the same time, we've been investing quite substantially digital over the last couple of years, and we announced our project digital intelligence, you'll remember of $1.5 billion investment in R&D. A couple of years ago, we did launch in Montreal. That, by the way, is why -- that investment is why we could turn ourselves around and go virtual literally overnight because of the ability to do that.But now post-COVID, everything is going virtual. Okay. Well, I shouldn't say that, but the world is obviously going virtual, but definitely, if digitization is probably multiplied, maybe just exaggerating for effect, it increased tenfolds. So the investments that we make here, the processes, leveraging digital is going to have substantial impact on how we deploy training in the classroom, specifically, how we deliver simulators as well. So all of these things that we're going after getting permanent savings that's where you're going to see it.
We'll go to our next question on the line from the line of Doug Taylor with Canaccord Genuity.
One more question on the cash flow guidance. I'd just like to understand whether your guidance is contingent on utilization rates for the civil aviation business moving materially, higher than the 40% that they've been -- you mentioned they're at presently or if you can achieve that same positive free cash flow with 40% throughout the balance of the year, for example?
I think it's a bit too early to give predictions on the level of utilization, but we do expect the ramp-up to be slower than we saw. And so we factored that into our free cash flow predictions.That said, we do expect some sort of inflection in the second half to drive a better performance in the second half, and that will be the driver of free cash flow improvement.
Okay. The utilization, I mean, during the summer months usually is a bit slower given the demand for products. I'm just wondering if that is at all a factor this year or if that whole seasonality thing can be completely thrown in the trash for this year when we look at utilization in July, August versus the fall and winter?
I'm sorry, we missed the first part of your question.
I think I got it. Yes. So there is normally some seasonality to training demand. The way to think about it is when pilots in various regions are very busy flying. They're less busy on the ground than the training centers, training. So in Europe, for example, the summer months are usually quieter in terms of training demand. And they'll plan out their annual recurrence -- the recurrent training according to the demands of the flying schedules.But to your second point, everything is out of whack in this environment. I mean having had the kind of operational disruptions that we saw through the first quarter and the demand shock, we got down to utilization levels on average in the network in the 20% range. So that's unheard of.
Yes. It was -- go ahead.
Just to add a bit more color on kind of some of the assumptions kind of underpinning the second half. We do expect some recovery, but also a higher level of deliveries. As you saw, only 2 deliveries this quarter. And so we do expect the deliveries to be very second half weighted as well. So that will drive some of the cash flow performance as well.
Okay. And one more question on the Civil side. The -- I mean, I wonder if you could provide an update on what some of the regulatory bodies are doing with respect to relaxing the training requirements, which, I mean, certainly was a factor early in this COVID pandemic. I mean, would you say that's back to normal across your geographies? Or is that -- how do you expect that to continue to evolve over time?
No. I haven't heard much about it at all in the past, literally, 3 months. So I think that was a one-off that was literally to cater for the fact that people literally couldn't get to the training centers because of border restrictions and things like that. So I think that one-off situation is behind us.
We'll get to our next question on the line from the line of Kevin Chiang with CIBC.
If I could just dig into the utilization rate. While we sit here today, the 40%, is there a way to think about what that looks like across your key regions, Asia, North America and Europe?And then if I were to split that between business and commercial training, is there a way to think of the difference in utilization between the 2? Or is it all pretty static around 40%?
I think you'll find business aircrafts a little bit more than Civil -- than commercial. The -- as an overall number, the -- I think I wouldn't really get big differences across the world. So let me just go to look at my notes here, but in the end -- do you have more details on it yourself, Sonya with regards to the data?
So what we're seeing is that, that is trending better than commercial comparing quarter-over-quarter. And in terms of regions, I think what we're seeing, the hardest hit is really in the -- the hardest hit is Europe. And that's what we're seeing Asia, still impacted, but doing pretty resilient, but really, Europe is where there's the hardest impact.
Yes. And North America, really -- good training in North America continues to lead the way from that point of view. We've seen less impact there. Borders, really, as you saw the ramp-up utilization, it was really effected a lot of the opening of borders.And so for example, Dubai opened up recently. So a business aviation activity will have -- will pick up quite substantially there because, for example, customers from Far East can't get to North America because there's restrictions, and we can serve their training demands on business aircraft in Dubai. That's just one example.
Okay. That's very helpful color. And then secondly for me, just on the restructuring, just wondering what impact if any that has on the simulators deployed in your own network. Is -- does this restructuring result in a shrinking of that network as maybe you get rid of simulator that might be tied to aircraft that have seen a significant decline in demand as airlines adjust their own fleet? Just wondering how that number trends as you go through this restructuring.
Yes. So I think one of the main impacts with the consolidation of some facilities where we have overlap. Now by no means are we exiting any markets but really consolidating to create larger center, drive more efficiencies.Another part of that restructuring includes relocation of assets so between training centers, and then matching them up across our geographies to better align to where the demand is and optimizing utilization. As part of that, there will be some assets with excess capacity that will be sidelined and, ultimately, sidelined until volume comes back. So we expect about in -- about 20 units of assets that will be relocated across the network in total and/or around 20 million ultimately and less than that, that would be -- much less than that, that would be reduced.
Okay. That's helpful. And maybe just last one for me. Just maybe following on some of the previous questions around the increase in virtual training. And I appreciate, I guess, some of the cost savings there. But wondering do you see that impacting maybe the relative capital intensity of Civil moving forward in the sense that it might reduce footprint you might need when you think of what the training center has to be in terms of size to flow a number of pilots. Like is there a capital savings associated with the increase in virtual training? Or does that not impact that line item?
Well, I think it would impact it for sure. I think that the -- there's benefits from us there's benefits from customers as well, right? If they have to spend less time at the training center, very big cost savings for them because they don't have to travel as much, be out in the line as long. So there's benefits on both sides.But yes, there will be some capital savings as well. I wouldn't call it a first-order effect, but it definitely will affect things.
And we'll pursue to next question on the line is from Cameron Doerksen with National Bank Financial.
Question on the, I guess, the Defence segment. So you've got new leadership coming in there. Marc, I'm wondering if you could maybe talk a bit about what his priorities are going to be. Or I guess, maybe what his marching orders are for the Defence segment? If there's anything different that you want to do there or any key priorities?
Well, I think, look, well, first of all, very happy to have Dan on board. As I mentioned, he has very, very strong credentials and track record in the defense industry and the job that he's done as well as in U.S. Military and Intelligence Committee. So I think, look, he's picking out the baton from Heidi Wood who's done a great job over the last few months at stabilizing our Defence business and laying a path for growth.And for me, it's all about executing growth. Look, you've heard me talk a lot about, but that -- I think, look, I think this year, 2021, it's a transition year for Defence, a lots going on. We -- as we won't go back at everything we said, but I guess just when I -- just to give you one data point right now because of the impact of resurgent COVID in the United States, look, our activity at our training center in Florida on C-130Js, where we train primarily foreign customers, is more -- is harder hit now than it was back in March and April. So it gives you one idea.So -- but to me, the priority is growth. There's growth market, we see a very, very sizable market. We've talked about that many times and really [indiscernible] and his makeup is a growth-oriented individual that has a solid track record. Used to working, by the way, in the kind of construct that we are in having special security agreements and selling into, for example, U.S. market. So I think we're going through -- I think that, for me, is it's all about growth beyond this year because this year is about stabilizing what we have and, because it's a tough year, about stabilizing and growing.
Okay. No, that's great. And maybe second question for me, just on the -- you're shifting over to Civil. You mentioned that you're in some perhaps advanced discussions with some airlines about potential outsourcing opportunities. Is that something you think you can execute on this fiscal year? And what's your willingness to deploy capital into any of those opportunities?
Yes. I think we definitely can secure some of those opportunities this year. Look, I don't hold the customers' pen on signing the contract. But clearly, I think there's a -- we have a very compelling solution to bring to bear, especially in these times. So I do think we'll see the opportunities, and we're in advanced discussions with a number of customers that I talked about.And yes, we'll deploy capital because as we've demonstrated over the past few years, when we deploy capital in our training network is very accretive and relatively fast. So we're quite happy about that business. Of course, it's our core business. We know it well. So yes, absolutely, we'll seize upon those opportunities. And I think we can secure some.
We'll get to our next question on the line is from Konark Gupta with Scotiabank.
Sorry to beat the dead horse here. Just on the utilization. If I go back to your comments back in May, I think you were suggesting 20% in April at the low point and then 25% to 30% in May. So if I do the math, perhaps, you might have been in the mid-40% range in June to get to the 33% for the full quarter. So first, is that math correct? And have you seen that mid-40% sustain in the first 40 days of this current quarter?
Well, we -- I think we averaged about 33%, as we said in the quarter. And we're in the 40s. And look, it's pretty much in line with the growth of the fleet. I mean, the correlation between the group -- you take the fleet of aircraft flying around in the world today and look at the increase, I think you'll find a very high degree of correlation between that fleet activity and the level of utilization of our training centers, which you might expect because, of course, it's a regulated market. So I'm never -- that's about what I would say on it, Konark.
Okay. And then just trying to reconcile some numbers here. So if I look at the training center utilization as well as similar to deliveries in Q1, they were both down more than 50% versus last year, but the revenue was down only 48%. So just trying to understand the mix. It seems like it's coming from business aviation, as you said, the utilization was better and which we probably do not see in the utilization numbers. Is there anything to the mix in revenue that should have driven revenue better than utilization and deliveries?
Not really. I think there's so many different elements to the Civil portfolio. I think 48% down on revenue and about half on -- more than half on the utilization. They're pretty much aligned, and we kind of see a similar level of reductions across the board on the portfolio items.
Okay. That's great, Sonya. And on the backlog side, so obviously, the order activity was reasonably okay, I guess, compared to where the revenue was. But there were some adjustments in the backlog that kind of led to, I think, a decent decline in the backlog. Can you kind of help us understand the nature of those backlog adjustments in terms of the amount or nature of maybe cancellations or adjustments.
No cancellations on any front. So no cancellations included in that adjustment number. It is larger than usual. And one of the items was there was a meaningful negative FX element, more than $100 million. The Canadian dollar appreciated quite a bit since the March, and we always revalue the backlog to the current FX. So quite a large impact on FX.And the remaining really reflects the impact of the training requirements and demand that we see from customers. So we've gone through their planning and their process of realigning operations and their fleet and working with us, so that captures some of that revised training demand in the near future.
Great. And last one for me. On the working capital side, so the inventory seems to have gone up sequentially. Are you building any whitetails in anticipation of any last-minute orders or that inventory balance is entirely for the contractual revenue in the second half?
Yes. So no, there are no investments in whitetails. We're actually being quite rigorous and frugal on inventory management as part of our cash preservation, noncash working cap. Management measures, what you see there is really a reflection of the fact that we only delivered 2 simulators in the quarter. And so you're building up your working process in anticipation of deliveries for the rest of the year.
We'll get to our next question on the line from [ Derek Edwards ] with [ GFL ].
On the topic of virtual training, do you think longer term that you'll get FAA approvals and approvals around not having to come into your centers? Do you think that lowers the bar for competition and brings the moat down thinking longer term and give ability on you to increase pricing power in this vein?
No, I don't see it. I really don't. I think it makes us stronger, to be very frank with you. I mean, people still have to come to the training center to do full flight simulator training. And to the extent that with the tools that we can provide to be able to do it virtually, that makes -- and using all of our simulation suite that we can make it seamless for them, I think it makes us even stronger, better. So I would have the reverse conclusion.
We'll get our next question on the line from the line of Benoit Poirier with Desjardins Capital Markets.
Yes, looking at simulator delivery, I understand that the Q1 was pretty abnormal with only 2. But when we look at the last 2 years, you deliver 58 and 56 deliveries. So how should we be thinking in fiscal '21 and fiscal '22, given the current market conditions?
Well, I won't go into fiscal '22. I think I would tell you that our assumption is we'll deliver about 35 to 40 this year, very much geared towards the back half because -- well, for obvious reasons, we're delivering all over the world, and some places that we're delivering to are -- still have restrictions on how we can get there. So like I said, 35 to 40 for this year back -- really much in the back half. And I'm not getting into the next year. We'll update that as we go forward.
Okay. And Marc...
And Benoit, the only thing maybe I'd add to that, we did say in our earlier remarks that we have a large backlog there that's funded by customers that we expect to substantially deliver over the next couple of years. It is just that, it is a large backlog and while we can't, at this point, precise what those delivery numbers would look like into the next fiscal year, I think you could infer that there is a large backlog there. And as things ease up, we will substantially deliver it. So if you're sensing whether there's a sort of a cliff impending, I wouldn't think that.
No. That's one of the effect that we have is the large backlog that provides a level of support for our business for quite well.
Okay. And if we stay in Civil, what are you seeing in terms of demand for training services in second half in the context of the training bubble that you talked about in Q1?
Well, I think, look, we made certain assumptions. I would tell you that it's very, very fluid. We -- airlines are, in large cases, are predicting their training demand month-by-month literally. So we're staying close to our customers. We have made certain assumptions when we talk about predictions for cash for this year. I don't think we've made outlandish assumptions with regards to what that bubble will be. So I think we sized ourselves to be able to seize the opportunity. But the situation is very fluid, as I said. So it's hard to predict how and when that will happen.
Okay. And if we go on Defence, the active bid proposal increased substantially from $3.6 billion in Q4 to about $5 billion. So could you talk about the reasons behind the increase? And also from a margin standpoint, what we should see in fiscal '21, given the mix between services and equipment?
Well, I think that -- what I would tell you, I think the size of the backlog -- or sorry, the amount of business proposals going up, we've been -- we haven't stopped on that front. We're still writing proposals, and that's the key to this business.Now what you see is a couple of things, right? That is -- first of all, we're bidding on larger contracts. We have the ability to be able to do that. At the same time, the awards haven't been as fast. So that -- the ones that we would like to already have order in hand is still in the business proposal. So that's more than the negative part.Look, in terms of margin, I think we'll just stay -- maybe Sonya will comment on that, but no big guidance on that one. Well, do you want to...
Yes. So as Marc mentioned, I think we will continue to see short-term -- well, disruptions throughout the year on execution of contracts and advancement as these travel restrictions and lockdowns continue. So we're kind of seeing this as the transition year, growth beyond, but a bit of a transition year. And the margin will be impacted by the level of advancement on these programs because, as you know, they're mostly product programs. So they're highly contributive to the SOI margin disproportionately so and also on order intake, right? So we've seen delays, Q4, Q1 on order intake, especially on the product side. And so that's contributing as well. So as that continues to impact us, I think we'll continue to see a bit of impacts on Defence throughout the year.
Okay. And what would be the mix between equipment and services in Q1, specifically for Defence? And are you expecting a big shift towards the Q2 in the second half, Sonya?
Not necessarily in the -- or in the second half, we do see some shift in order to support kind of like a stronger second half. In this quarter, it was in the 30s, which is much lower than usual.
Okay. That's great. Okay. And last question for me. With respect to government subsidies, what should we expect in terms of subsidies in Q2 and maybe the second half?
It's hard to say because for some of these programs the criteria keeps -- or gets updated. We're operating in 30 different countries, and these measures are really shifting in every country. The most important one is here in Canada, of course.For the most part, certain locations like Europe, et cetera, these subsidies are straight flow-throughs to employees that have been furloughed or impacted and so on. On the Canadian side, it really will depend on the -- on CAE's eligibility criteria. So we were eligible in this quarter, and so we continue to monitor on whether we will continue to be eligible in the coming months.
[Operator Instructions] And we'll get to our next question on the line from Tim James with TD Securities.
Maybe a question here for Marc. The press release states that CAE is applying digitally immersive technologies to further differentiate solutions and address a wider range of customer needs. I'm just wondering if you could please expand on sort of what that wider range of needs could include?
I guess I won't get into too much right now, Tim, but you might think about -- look, at the end of the day, CAE is a technological power, and we've demonstrated -- and I've talked about that in my notes that we've demonstrated space how we can bring that to bear in an extremely short amount of time with the development certification of a simulator. This was not sort of a ventilator. And I keep coming back to that because it's a quintessential example of what can be done.This is not a simple device, it's a life-saving device certified at the highest levels of Health Canada, not a water-down pandemic requirement. A real requirement for the use on most critically ill patients in an ICU setting, who are using pure oxygen.So the fact that we're able to do that, again, not a build to print, but new design and completely build it and now are producing 10,000 units for the government of Canada is testimony to the technological capabilities of this company and the culture in which we do it.So if you think about how that can be translated to -- and by the way, we demonstrated that in the ventilator, but if you think about what we've -- who we are, we've always been a technology-based company. We're -- our focus has been on a world of training in our core markets and that we will continue to excel at that.But if you have to think about a ventilator, a ventilator is not a training device. Now it is whether we combine it with a full training suite, in fact, we could basically -- the expertise that we have to be able -- the subject matter expertise that we need to be able to develop came from the fact that we're training experts. So there's a lot more we can do with that technological capability.In Canada, for example, just as a for instance, I think Canada walked into this crisis with no indigenous capability to be able to do ventilators in Canada, that's why Prime Minister Trudeau announced 3 Canadian companies to be able to do so.Now I don't think Canada ever wants to get flat-footed again in that kind of situation. So there's a talk about self-sufficiency, just the fact that Canada buys -- makes its own ammunition for weapons, not because it can't source it anywhere else in the world because if there was a certain emergency, war-time type like situation, they don't want to have to rely on somebody else for bullets. Well, now that kind of thinking is being turned to medical equipment. Obviously, we hear a lot about it, personal protective equipment, that kind of thing. So if we have this competitive device, and we do believe it's competitive, by the way, right out of the box. You might think that, and we are seriously looking at that, can we continue provide that type of equipment, not only in Canada. And that's just one example. But I can think of a whole source of example, I brought in Heidi Wood as our Head of -- at my level, Executive VP of Business Development and new growth opportunities. And I think what's important there, as I brought her in before this pandemic ever was -- seen the light of day because we have been thinking for a while that there's a lot of areas that we can leverage our technological capability. But now, of course, post-COVID in the civil aviation market that would -- we're not going to be Pollyanna and think that's going to come back anytime soon.But we think there are a lot of things that we can do to -- that are -- be able to grow within the -- well, obviously, we do things like capture more outsourcing opportunities, grow Defence, growth Civil. But the technological capabilities that we have, including very large capabilities in digital and leverage that into other areas, not necessarily new markets, markets we're in but deepening our share of wallet for our customers, and that's right in line with what we do because we always -- right embedded in our vision of the company is partner of choice. And that's what we do. We get into with our customers. We don't -- we're like, yes, we'll try to sell you a similar -- or try to sell you training, will supply your path. But more importantly, we get into a relationship, and we stay connected because of our focus on delighting the customer and providing technological-based solutions that enable them to answer some of the critical needs that they have.So that's what we're talking about. So watch -- I think you'll have to watch us over the next few quarters and watch stuff we'll do. But certainly, we're going to put some bets down. We're going to put some bets down. I think we should do that, and I think we're very good at agile. And if you've heard the term I like it's that -- and that's well used in Silicon Valley and places like that it's about fail fast. Try things, use agile methodologies and fail fast, test them on your customers, get some customer feedback and see if they work, see if you get traction. That's the kind of things we do.Long answer, not a lot of specifics, but that's what I do right now, Tim.
Okay. My next question, I'm wondering if you could talk about that portion of Civil equipment revenue that isn't just the big-ticket full flight simulators. Approximately, how significant is that portion of civil equipment revenue relative to full flight simulator sales? And is it more or less stable under current conditions or conditions of weakness because it's easier to meet milestones, deliver the product, it's not impeded by travel restrictions, et cetera?
I think what we would call the after PTS Skype services, I don't think we've ever supplied the breakdown.
Yes. Tim, we don't actually break that out, but I would say that it's a fairly significant part of the business we do in Civil. It's mainly driven by regulation. So that is to say, whenever an aircraft is updated, usually every couple of years, the aircraft systems, the simulators need to be updated. And then there are regular maintenance items as well. I mean a simulator will run day in and day out for 25 years or more. So you can imagine that there are things that have to be updated just by virtue of where and others that need to be updated by virtue of regulation. So typically on a simulator that we'll sell will generate about $1.50 million to $2 million of PTS revenue or updates and upgrades over its lifespan on it -- in the installed base.
And is it fair to say that aftermarket revenue source is more stable during times like this than just the outright sale and delivery of full flight simulators, I assume?
Well, go ahead.
No, I think it's affected as well everything at the airlines that has been affected by this crisis, and that has been affected as well.
And trave restriction...
Yes. Travel restrictions within a lot of cases, to be able -- for us to deploy those solutions, we have to travel, and with the restrictions that we have, we haven't been able to travel as well. So I wouldn't make the assumption that, that is, I mean, maybe, a little bit more stable, but I wouldn't say materially.
Okay. My last question, just want to turn to the 737 MAX. I mean, over the next couple of years, it's going to be, sort of, moving a little differently, I think, relative to a lot of the commercial aircraft platforms, given the challenges that it's had in the past. Do you have any sense for the timing of kind of deliveries at this point and training demand outlook for that platform? And when you expect that, that could begin to positively impact financial results? Is it as simple as kind of thinking about when the grounding is lifted and deliveries of the aircraft resume that coincidentally, sort of your revenue will ramp up?
Well, well, certainly and even before because they obviously have to train their crews ahead of time. So I think we work very, very closely with Boeing, specifically in assisting them too with the certification efforts in support of activity for -- as it relates to training. And of course, you would expect us to be doing that because we have the lion's share of all the simulators that have been sold on the 737 MAX. So we're very close to that story. And we think that Boeing is making great headway with the certification authorities.I think we saw recently the FAA issue their notice of proposed rulemaking with comment date that's very soon. So that, to me, is a signal that things are close, then they have to get it certified for -- the certification of the aircraft have been certified for operations. I think that should follow pretty quick, I would say. But you'll have to have Boeing for that.But I think suffice to say that as soon as that is -- it is lifted, then airlines will, I'm sure, will be taking the airplanes. That's an airline-to-airline situation. But we -- well, you saw Michael O'Leary at Ryanair saying he's definitely going to take all his aircraft. That's what he said, and they're a good customer. So I'm sure that they're maintaining their training on their 737 MAXs. So I think we'll be in lockstep with delivery and the return to service of the various fleets of aircraft.
Operator, I see we've gone over the allotted time a bit here. So I think we'll conclude the Q&A session for analysts and investors now. And we'll open up the lines to members of the media.
[Operator Instructions] And we'll get to our first question on the line from the media from Allison Lampert with Reuters.
Are you seeing any increase in pilot training on wide-body models, like the Boeing 757 due to the industry's demand for cargo flights?
Well, we definitely see cargo going up for sure. The cargo car is a -- are having a high level of activity because of almost -- some of these online shopping, which certainly is a big thing in my house. so I think that -- yes, we are seeing more opportunities in -- for cargo carriers, absolutely.
Can you specify at all in terms of trading on the wide-bodies in your centers?
I can't really know. Look, I would tell you, we don't have a huge amount of wide-bodies in our training centers. There's more -- we have some, but it's more a narrow-body fleet. Now what you see though is more airlines actually using even narrow-bodies to carry increased levels of cargo because the lion's share of, even though there's dedicated cargo carriers, a large lion's share of the cargo is carried in the belly of aircraft. So there may be less passengers, but there's more cargo in a lot of cases. So I can't really be more specific than that to be honest, Allison.
And just one last follow-up. How much demand do you see for pilot training in the United States or opportunity, given the retirements you've just seen and potential furloughs in October?
I think, look, the level of activity for training right now in North America is pretty good. It was pretty high. I would say -- one thing I would point you, it's not necessarily simulator-based training, but I put you with the -- on the training of pilots.It's interesting -- you might think that you talked about furloughs of pilots at that, there will be no demand for pilots. But when we look at the industry overall dynamics for the next 2, 3 years, there will be a need for pilot, new pilots because of the ones that are being furloughed. I think it's -- we announced just 1 contract that we received -- that we announced in my notes from Boeing where they put us on a contract for pilots. So that -- therefore, you see they're being bullish on the fact that there will be pilots needed for the future, new plants.And I would add to that, we're the largest company in the world in terms of training pilots to become pilots. So not using simulators, but using our training aircraft in our various training operations. And what I could tell you is none of the airlines that we trained and we trained a lot of cadets for airlines, none of them have reduced their level of activity, which, again, is testament to the fact that, yes, there's a tough time right now, and there's aircraft in part. So there's furloughs, there's early retirements. But if you like, we were -- when -- if you thought about what we're talking about, literally in February is how -- where are we going to get all these pilots. Now we have a situation of furloughs. But things will come back, and it takes 2 -- depending on where you are in the world, it takes 2 to 3 years to train a new pilot. So we see renewed demand. I think if youngsters want to become pilots, it's still a good time as far as I'm concerned.
Okay. Operator, I see there are no more questions queued up. And so I want to thank everybody for joining us this afternoon for listening to our remarks. If you'd like to get a transcript of today's remarks, they will be made available on CAE's website at cae.com. And again, thanks for joining us.
Thank you very much. Thank you, everyone. That does conclude the conference call for today. We thank you for your participation. You may disconnect your lines. Have a good rest of the day, everyone.
Thank you.