Heroux Devtek Inc
TSX:HRX
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Heroux Devtek Inc
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Good morning. My name is Julie, and I will be your conference operator today. At this time, I would like to welcome everyone to Héroux-Devtek Fiscal 2021 First Quarter Results Conference Call. [Operator Instructions]Before turning the meeting over to management, please be advised that this conference call will contain statements that are forward-looking and subject to a number of risks and uncertainties that could cause actual results to differ materially from those anticipated. We refer you to Slide 2 of the accompanying presentation available on the company's website for the complete forward-looking statements. I would like to remind everyone that this conference call is being recorded today, Friday, August 7, 2020, at 11:30 a.m. Eastern time. I would now like to turn the conference over to Mr. Martin Brassard, President and Chief Executive Officer; and to Mr. Stéphane Arsenault, Vice President and Chief Financial Officer of Héroux-Devtek. Mr. Brassard, please go ahead.
Thank you very much, Julie, and good morning, everyone. [Foreign Language]On behalf of all of us here in Longueuil, welcome to our first quarter earnings conference call for fiscal 2021. Fiscal 2021 began in a context where we knew we needed to act quickly to lower our fixed and variable costs, redistribute some of our civil capacity to accelerate defense product deliveries and to focus on healthy cash flow generation. It is fortunate that we did since, as expected, the large commercial segment was heavily impacted by the very low international and domestic passenger demand worldwide. As a result, lower OEM demand led our twin-aisle deliveries to decrease by 44% compared to last year. Fortunately, other civil aerospace sector markets have been less impacted. While the defense sector to which we shifted our focus has generally continued to perform well throughout Q1, outselling the first quarter last year in spite of the pandemic-driven inefficiencies. This being said, there is no question that the current downturn is one of unprecedented magnitude, which cannot be compared to previous crisis. As I pointed out earlier at our AGM, the fact that this is a health- and confidence-driven crisis implies a very low visibility for all stakeholders in our industry. We know that passenger demand may not return to normal patterns for few years or until a major positive health development occurs to restore passenger confidence on a global scale. This is why we decided early on to structure ourselves to perform well and deliver profitable results even if the pandemic were to last longer. As a result, our strong liquidities and cash flow meant that we could focus exclusively on operating the business, supporting our clients, and pursue business opportunities across each civil and defense market. What's also helped us greatly, as we pointed out in the past, is that we have entered the pandemic with the funded backlog at the record levels and over 2/3 of which is for defense market orders. As of June 30, 2020, our funded backlog reached $772 million compared to $810 million 3 months prior. Before I talk to the quarters ahead, I will now ask Stéphane to go over our Q1 results in greater detail. Stéphane?
Thank you, Martin, and good morning, everyone. As usual, please be aware that we will be referring to certain non-IFRS measure during the call, including adjusted operating income, adjusted EBITDA, adjusted net income and adjusted EPS. Our non-IFRS measure are defined and reconciled in the MD&A issued earlier today. In Q1, consolidated sales decreased 10.5% to $128.3 million from $143.4 million last year. Specifically, civil sales were down 25.9% in Q1 from $67.4 to $49.9 million. Defense sales were up 3.2% from $76 million to $78.4 million. In Q1, defense sales accounted for 61% of our consolidated revenue, up from 54% in fiscal 2020. The decrease in civil sales resulted from lower demand in the large commercial sector, where twin-aisle deliveries decreased 44% due to the ongoing pandemic, as mentioned by Martin. In Q1, gross profit decreased from $24.2 to $20.5 million as a result of the reduction in sales caused by COVID-19. The pandemic also caused additional costs and production inefficiency, which we were partly -- which were partly offset by government relief measures. As a percentage of sales, gross profit decreased from 16.9% to 16%, mainly as a result of lower sales volume without the corresponding decrease in fixed costs, such as depreciation, which represented a year-over-year impact of 0.8% of sales. Operating income decreased to $1.4 million or 1.1% of sales from $10.4 million or 7.2% of sales, due mainly to restructuring charge recorded in Q1 and lower sales volume. Foreign exchange also had an unfavorable net impact of $0.7 million or 0.5% of sales. Adjusted EBITDA, which excludes nonrecurring items, stood at $18.4 million in Q1 or 40.3% of sales compared with $21.5 million or 15% of sales a year ago. Earnings per share decreased from $0.18 last year to a loss of $0.04 in the first quarter this year, due to the factor mentioned earlier. Excluding onetime charge, adjusted EPS reached $0.09, down from $0.19 last year. Let's now turn to our cash flow and financial position. Cash flows related to operating activity reached $15.5 million in the first quarter, up from $3.7 million last year. The increased results from stronger collection of receivable this year versus last, partially offset by lower adjusted EBITDA and cash charge related to restructuring. Inventory increased by $18 million during the quarter, with 81% of this amount relating to growing defense programs. While under circumstances, it may be surprising that civil inventory increased as well, this trend is expected to gradually reverse now that we have received deceleration orders from our customers. As of June 30, 2020, our net debt stood at $233.2 million, down from $246.9 million 3 months prior. The decrease in net debt is mainly related to the cash flow generation over the quarter. At quarter end, we had $205 million in available liquidity. Back to you, Martin.
Well, thank you, Stéphane. So before opening up the call to questions, let me conclude our remarks by a comment regarding the future. As mentioned earlier, there is no question that we continue to navigate in a low visibility situation as to the duration and the severity of the pandemic and the speed of the recovery. Our approach in this context is to continue to focus on our vision and objectives. One of them is to pursue business opportunities across each aerospace market. Our approach here is two-pronged. First, to position ourselves to seize opportunities when passenger traffic ultimately resume, but also and perhaps more importantly, in the short term, to take advantage of our attributes, reputation and our strong relationships with OEMs and Tier 1 players to generate growth as we continue to weather the storm. As a reminder, we will be delivering our first F-18 main landing ship sets during the current quarter, ahead of Boeing schedule. Another demonstration of our operations' ability to exceed customer expectations. Let me conclude my remarks today by thanking every single one of our employees for their hard work and extraordinary resilience. We are truly grateful for your continued commitment to Héroux-Devtek's success. Julie, we are now ready to answer questions.
[Operator Instructions] And your first question comes from the line of Konark Gupta from Toronto.
I wanted to kind of ask you a question maybe first on the commercial side. So the revenue on organic basis was down 28%. But then if you look at the Airbus and Boeing production rates, they were down 30% to 40% initially. I was just wondering, is there anything in the commercial segment that helped during the quarter?
Well, as we highlighted, the twin-aisle reduction was 44% as we were expecting. This is not a surprise for the other program. As you know, we have a diversification in our revenue from the business jet to the helicopter and regional sales that we do with various customers. So the negative impact was the twin-aisle. The large commercial single aisle was pretty stable. And the other segment of revenue, we have a good quarter for helicopter segment.
Okay. Makes sense. And the Airbus and Boeing, they also kind of recently announced incremental production cuts for wide-body aircraft. So whatever production rates you saw in the first quarter, do you expect that to take another step down in second quarter and going forward?
Well, the main program in the large commercials segment with -- is the Boeing 777, 777X program, where they announced a reduction from 36 to 24 aircraft a year for -- that is planned during the calendar year 2021. So for us for the first year, our forecast is pretty much in line with what Boeing had announced already. So that's no impact for the first year. For the second year, we have -- we were slightly higher than the 24 aircraft that Boeing has announced. But on the other hand, what I want to point out is that the first quarter of this year, we delivered 6 aircraft of 777 and 777X combined. So that's the 24 aircraft. So that gives you a good sense of the actual revenue we had in Q1, essentially aligned with that production rate.
And when we did the workforce adjustment, we -- in our scenario, we took a conservative approach. And the latest announcement were a little bit lower than what we had on plan. And we believe that this reduction -- this further reduction could be compensate with defense orders.
Okay. That makes sense. Then moving on to the margin side. So margins were down slightly, and like they could have been down more, I guess, given where the volumes were. I was wondering if there were any nonrecurring factors like the rate subsidy or anything else that helped you sustain these margins here. And then if you exclude those nonrecurring items maybe -- or items that will not repeat, maybe in the next few quarters, where is the sustainable margin today?
Well, first, we -- as you know, we announced the restructuring during the quarter 1, so in May. We'll add the full benefit from the restructuring in the coming quarter. Obviously, since this was done during the quarter. In reference to the COVID-19 impact, we had some additional costs and an inefficiency lots of hours during the quarter, which were partly offset by the Canadian wage subsidy that you were mentioning. So -- but all in all, the net was still unfavorable for us in terms of the result for Q1.
Okay. Makes sense. And the last one for me before I turn it over. Can you comment on the business opportunities? You mentioned in the press release? Where these new business opportunities might be coming from in terms of product type or geography? I know one of the opportunities maybe for you guys would be the Canadian government's fighter jet program where, I think, Lockheed Martin and Boeing have submitted their proposals. So can you comment on the business opportunities, please?
Yes. Well, this -- if our customer wins these campaign, of course, it will cascade down to us, and that will help us to grow our defense sales there. But the opportunities that we're talking about are new potential contracts and both in the defense and civil sales side of it. So like I said in the previous call, so I was surprised that we were presented with some opportunities later on in the quarter. And so we did our job, and now we're expecting an answer. So hopefully, we'll put the puck in the net.
And your next question comes from the line of Benoit Poirier from Desjardins.
Congratulations for the quarter and in light of the environment. Just coming back on commercial, could you provide any update on what you're seeing on the A-220 and the E-2 programs?
Well, what we're seeing is, on the A-320, it's mainly the rate that was announced by Airbus on the A-320. The thing here is, we're selling to a Tier 1, so this contract is a bit more vulnerable than when we provide the full system. Right now, contract as respected. So we're okay. 220...
I think, Benoit, your question was referring to the 220 or the 320?
The -- more the 220, yes.
Sorry, sorry. So the sales with the 220 is performed -- it's the same situation. We're selling to Laval, right? The contracts are selling to Laval. We're seeing the rate announced, right? Where -- and this contract is currently in negotiation with our customer, with Embraer. So we're transferring these contracts to other facilities, like we said, and it's going per plan.
Okay. Okay, that's great. And just in terms of integration, could you maybe provide some color about the integration of Tekalia in the current environment?
Well, Tekalia, well, it's a strategic asset. It's performing well given the circumstances. So we're working -- so we have improved the performance of the business. Well, thanks, it generated positive results this quarter. And we see opportunities coming when the markets pick up. It's a critical asset. So the team is working very well. Right now, we're in the second quarter, as you know. So it's a slow -- historically slower quarter for Héroux-Devtek because of vacation and part -- plant shutdowns for some holiday's period. But we're very happy with the performance of the Tekalia in the first quarter of the current fiscal year. Anything to add, Stéphane?
No.
No?
Okay. That's great. And moving on defense, I mean, revenue growth was around 3% this quarter, but could you help us with all the opportunities in front of you? Should we expect any acceleration of growth for defense in fiscal '21?
Well, essentially, as a reminder, Benoit, this quarter will be the first quarter, we'll deliver the Boeing F16. So this is going to be an add-on to our revenue since we have not yet shipped any. So we'll ship that this quarter. So that's a good add on to our defense revenue. And in addition to that, we're ramping up on other programs like the CH-53K with Lockheed Sikorsky and the Gripen with SAM. So these are all projects that we have already in our backlog. So it's not a new business to get. We have the contract in our backlog. And we see also a lot of activity on the F-35 program. So we have good order there with Lockheed for this program.
Okay. That's great. And last one for me. Could you talk about the M&A? You recently mentioned that the pandemic could create some M&A opportunities for you. So could you provide an update on what you're seeing in terms of M&A front?
Benoit, right now, it's the same situation. So it's -- we're harnessing the opportunities. We're looking. We're making our own work. And as soon as some companies are ready to be sold or up for grab, we're going to be there and we're going to be ready. So we have our target list, and we're monitoring the situation very closely.
Your next question comes from the line of Mona Nazir with -- from Toronto.
Congratulations on the quarter. Firstly for me, just another way of perhaps asking the prior line of questioning, just to get a sense of the wind down in demand. So commercial volume declines were 44% year-over-year. Overall, Civil segment was down 28%. As we're now into the second week almost of August, is there any just color on how the figures are sitting at this point in time? Is it materially different?
No. No. Specifically, I believe, for 777, as I said, we delivered 6 ship sets. And this year, we anticipate to do 30. So it's possibly the lowest quarter based on our forecast was Q1 in terms of delivery for 777 and the X. So nothing has changed there. Yes, we have to remember that the big companies like Boeing and Airbus were shut down in the early of the quarter that they were not taking deliveries of their products. So it moved fast, right? Five months will pass. But at the beginning of April and May, it was turbulent, if I may say.
Yes. Okay. No, that's very helpful. And then just secondly, I understand that there is second waves of COVID, spring in Europe, Spain's under locked down once again. I'm just wondering if you've had any additional COVID cases and if it's had any impact on operations?
Well, thank you very much for asking. I'm very proud of the performance of the team here. Basically, we had total 12 cases of COVID, right? If I remember, 12 case of COVID, which were mainly at the beginning of the pandemic. So the protocol that we have deployed starting in Spain. And then here in North America and the U.K. is working. And there was nobody that caught the virus, while working at the Héroux-Devtek site. So the protocol is working, the people are at work. And all in all, everybody is happy to work.
Perfect. So no disruption to operations in months now? Not at all?
No, no, not because -- so it was mainly inefficiency caused by uncertainties of the situation. If you remember at the beginning, closing of the jurisdiction. So we said that we had a tough month in April. And then it was somewhat stabilized in May, and June was almost back to normal, right? What?
97%.
97%. Yes. So -- but the -- so all the cases were early on. So lately, maybe we have 1 or 2 case since the beginning of June, mainly here in our Québec site.
Okay. That's helpful. And just lastly for me, just going back to the defense side. So I mean, you saw some growth as despite the pandemic backdrop this past quarter, and I appreciate your comments on new programs. But as normalcy returns, economies open up, efficiencies increase. Would it be fair to say that we could see higher than 3% growth from the defense side, especially as from prior comments, you were looking to pivot operations to capitalize on the stronger defense backlog?
Yes, it's fair to say it, Mona. It's fair to say that it should be more than 3.
Yes, F-18, as I said, it's going to be a plus. We're not delivering any F-18 this quarter, right? So it's going to be the first one in Q2, so it will be an add on.
And what you have to realize, and when you're shifting production capacity from a civil to military, it takes some time before we see the results. The lead time, the manufacturing lead time of our product, we don't do popcorn. I really used to say. So it's complex, so we need to realign the capacity. So we'll see better -- we should see better than 3%.
And your next question comes from the line of Cameron Doerksen from Montreal.
So maybe just a couple of questions just following up on some comments you made earlier and other questions. The first one was just with regards to the A-320 and A-220 contracts that you have where you're kind of, I guess, a subcontractor. I got the sense that maybe there was some risk around losing some of that business as the Tier 1s kind of consolidate some of their contracts? I mean maybe you can just talk a little bit about where you see the risks of potentially that business going away.
There's always a risk, but we have -- we're under contract until -- we have not disclosed the length of our contracts, but we're under contract with these 2 Tier 1 companies. And what we want is we will honor our part of the contract, and they will honor their part of the contract. So but there's always risk, Cameron. We're in that business, there's always risk like we said. We have transformed the business over the years to produce more value-added program and product. And this is why we're much -- in a much better situation than we ever been in the past. I remember that you were saying that are we going to see the margin level that we saw in 2000, 2001, right, Cameron? But today, we have a better product portfolio where we're supplying complete assemblies and complete systems as opposed to a part maker. So that's what we -- that is exactly why our strategy is paying off right now.
Yes, absolutely. No. Okay. That's good to hear. I guess maybe just following up on the margin question. If I look at the margin this quarter. I mean, it's a good performance, given the revenue decline. And I guess maybe my question is, if we kind of normalize for maybe the extra costs you would have incurred in the quarter as well as a potential offset from government support. I mean, at $128 million in revenue is a 14.3% EBITDA margin, a sustainable margin?
Well, we don't give guidance, right, on the margin. We can certainly say that the margin in Q1 of 14.3% of EBITDA margin is certainly what we are targeting for this situation we have this year. So -- but there's nothing to add to this.
Okay. Fair enough. And then, Stéphane, just a couple of, I guess, questions on the balance sheet. Accounts receivable dropped a lot. I'm just wondering if there was something unusual in the quarter that would explain that.
No. All the team effort that we had across our plant, and we have put systematic review and big focus on the receivable. So there's nothing special other than a good job that was done by all of our team across the sites in order to make sure that we receive our payment on time with the customer, and the numbers are reflecting of this effort.
Okay. And on inventories, I mean, you mentioned that you'd expect, given the deceleration, I guess, in some of the commercial programs that maybe inventories would start to drop. So I mean, do you think that we should expect positive cash from working capital generation this year?
For us, this is an event. There is going to be the biggest next opportunity in the coming quarters. So as Martin said, you're not switching the boat rapidly in this industry. So we are doing that transition. 80% of the increase was from the defense sector for the program that we have ramped up, such as the F-18, and I mentioned also the F-35, where we are expecting more sales. So that contributed to that increase. And on the commercial side, we'll see the effect in the coming quarters. So we -- the signal that we receive from customers is always a bit late on the production rate announcements. So we are reacting to this. And that will be an opportunity for us in the coming quarter in terms of the reduction of inventory.
Okay. That's good. And final one for me, just on the, I guess, the cash position that you're carrying, seems kind of high to me, $114 million. Is there any reason why you would need to carry that much cash? Or does it make more sense to pay down some of the credit facility?
Yes. Well, this -- we draw $60 million at the beginning of April, $45 million from the main credit facility and $15 million from the FTQ loan we have in place. So this was a precaution to the pandemic. We want to keep this level of cash until fall. So -- and as we adjust with the pandemic, we'll repay the debt.
[Operator Instructions] Your next question comes from the line of Tim James from Toronto.
Just wondering, you provided some good insights on some of the defense programs that are ramping up here over the balance of the year. Just wondering if there are any particular defense programs notable ones that are actually slowing over the course of fiscal '21? Or are you really just going to be kind of enjoying the benefits of the ramp-up?
Well, the two program that has slowed down like we were expecting this was planned is the Hawk and the [indiscernible] Tier 1 that we are referring in our MD&A, in our sales explanation variation. So this is as expected. I mean, this is part of the plan. It's not a surprise since the revenue from those program will be essentially aftermarket. Production is either completed or at a very low rate for these 2 programs.
Okay. So it sounds like relative to the first quarter, the second, third and fourth shouldn't -- there shouldn't be a material drop down, like further drop related to those programs, you're kind of at that lower rate now?
That's correct.
Okay. Great. And just a quick housekeeping question. You mentioned 6 777 deliveries in the first quarter of this year. What was it in the year ago quarter, Stéphane?
15. We went from 15 to 6.
Okay. Okay. And then just my last question, on the closing of the Alta Precision facilities, I think, could you just refresh us on what sort of primary programs that impacts and will benefit? And kind of where that work will go?
The closing of the Alta precision?
Yes.
Well, essentially, the manufacture built-to-print component for the C Series, for the E-2 program through Embraer. We also have parts on 787 and 350 axle's component that we do to Safran. And we also have military order on various spare parts program for the U.S. government. So these... So these parts will be relocated either in our facility in -- mainly in the Kitchener, Cambridge area, where we have a lot of capacity, some in Laval and some in Springfield, Ohio, while where we already tooled up and industrialize for those part.
And there are no further question at this time. Thank you, ladies and gentlemen. This concludes today's conference call. You may now disconnect.