Heroux Devtek Inc
TSX:HRX
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Heroux Devtek Inc
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Good morning. My name is Anas, and I will be your conference operator today. At this time, I would like to welcome everyone to Héroux-Devtek Fiscal 2022 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 company's presentation available on the company's website for the company forward-looking statement. I'd like to remind everyone that this conference call is being recorded today, Tuesday, August 10, 2021, at 11:30 a.m. Eastern Time.I will now 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, sir.
Thank you very much, Anas, and good morning, everyone. [Foreign Language]As you know, we just completed our 2021 Annual Meeting of Shareholders where we presented in some details our fiscal 2021 results and those of the first quarter of fiscal 2022. I invite you to refer to the Investors section of our website for a recording of the event and the transcript of our remarks that will be posted there shortly. We will now give you a summary of the results of the first quarter of fiscal 2022.I am encouraged by our Q1 results and namely by our ability to continue to deliver strong profitability and cash flows. This performance enables us to further strengthen our balance sheet and deliver value for shareholders.Excluding the impact of foreign exchange, our sales grew 5.7% compared to last year. Our defense revenues, which were up 21.5% in Q1, continued to outpace the decline in the civil sector. The strong growth recorded in the defense market resulted mainly from a ramp-up of deliveries under the Boeing F-18 and Sikorsky CH-53K programs as well as from higher aftermarket demand.As of yesterday, we had repurchased for cancellation a cumulative total of 672,827 common shares at an average exercise price of $17.69 per share for an aggregate cost of $11.9 million. This represents 28% of the 2.4 million shares allowed under the program over its first 11 weeks. In our view, this NCIB initiative represent a flexible method of optimizing capital allocation and providing immediate value to shareholders without compromising our ability to pursue future growth initiatives. Stéphane?
Thank you, Martin, and good morning, everyone. As usual, please be aware that we will be referring to certain non-IFRS measures during the call, including adjusted EBITDA, adjusted net income and adjusted EPS. All non-IFRS measures are defined and reconciled in the MD&A issued earlier today.Let's now turn to the highlights of our fiscal results for the first quarter ended June 30, 2021. Consolidated sales decreased 1.7% to $126.2 million compared to $128.3 million last year. Weaker foreign exchange rate, particularly against the U.S. dollar, had a negative impact of $9.5 million in the quarter or 7.4% compared to the same quarter last year. Excluding FX fluctuations, defense sales were up a solid 21.5% from $78.4 million to $88.5 million, while civil sales were down 19% from $49.9 million to $37.6 million due to the enduring impact of the COVID-19 pandemic especially for twin-aisle aircraft.In Q1, gross profit increased from $20.5 million to $21.6 million, resulting mainly from the positive effect of restructuring initiatives on our overall cost structure and partly offset by the 1.1% negative impact of foreign exchange fluctuation. As a percentage of sales, gross profit increased from 16% to 17.1%.Operating income increased to $10.8 million or 8.6% of sales from $1.4 million or 1.1% of sales last year, which reflected $6 million of restructuring charges. Excluding nonrecurring items, adjusted EBITDA stood at $20 million in Q1 or 15.9% of sales compared with $18.4 million or 14.3% of sales a year ago.Earnings per share increased from a loss of $0.04 last year to earnings of $0.19 in the first quarter. Excluding onetime charge, adjusted EPS more than doubled to $0.19 from $0.09 last year.Let's now turn to our cash flow and financial position. Cash flow related to operating activity reached a strong $18.2 million in the first quarter of fiscal '22, up from $15.5 million last year, mainly driven by higher adjusted EBITDA. At June 30, 2021, our net debt stood at $148 million, down from $157.5 million as of March 31, 2021. The decrease in net debt over 3 months period is mainly related to cash flow generation net of cash allocated to share repurchase under the normal course issuer bid.Over the last 2 years, we have reduced our net debt by $122 million, which has brought our net debt ratio down from 3.2x to 1.6x EBITDA. This is a clear demonstration of Héroux-Devtek's stability to generate cash on a sustained basis.Another important recent development in our financial flexibility objective was the announcement in mid-June of the extension of our revolving credit facility and of our term loan facility with the Fonds de solidarité FTQ. Combined with our available liquidity totaling $282 million, the expanded $200 million accordion feature would allow us to deploy nearly $500 million with no major principal repayment until June 2026. Our objective, as stated in the past, is to be prepared to act quickly should an opportunity arise.Back to you, Martin.
Well, thank you, Stéphane. Before opening up the call to questions, I wish to make a few comments regarding the future.We have maintained our client-first approach throughout the pandemic and remain committed to deliver quality products on time all the time. Our customers have, therefore, continued to demonstrate confidence in us with contract awards as a result. Our restructuring efforts are also yielding the expected results as you saw in our margin this quarter. Yet, we continue to make further adjustment to our production system with the objective to deliver even stronger throughput.Anas, we are ready now to answer questions.
[Operator Instructions] Your first question comes from Nauman Satti with Laurentian Bank.
My first question is around your margins. They came in pretty well. And from what I understand, the second half of your fiscal year is generally more stronger. So in the first quarter, the margins have already been up. The second period is likely to be more stronger. As Civil segment sort of comes back, you've mentioned in the press release that there's going to be probably some cost absorption with the same production capacity.I'm just wondering that previously when you guys said that the margins would be within the 15% and 16% range. But are you guys thinking that, that may increase or is there a Canadian wage subsidy that's going to fall off and it's still going to be between 15% and 16% range?
Well, we always said that between 15% and 16%, that is true. It's a good performance in terms of profitability and sales mix, and we will continue to drive to the upper range of the 15% to 16%. So Stéphane, do you have anything to add?
No. I think you said it all. I think we are on the same path as what you described. And everything we've done in the past year, I think, is showing their result in the gross margin.
Okay. Fair enough. No, I was just coming from the thought process that the first quarter has been that strong that maybe you guys are going to cross that if the second half is that good. But fair enough.I'll get to the second question that, you may have mentioned it in your MD&A, but I couldn't see it. With your backlog, how is the maturity for this backlog in terms of like, does it have to be done over the next 24 months or is it spread larger than that? If you could provide some color on that.
Well, first, it's only firm orders in that backlog. So depending on the customers, like you can have an order for 24 months to 36 months, but some others are just giving you 3 months window or 6-month window, mostly on the commercial side.So it's difficult to look at the overall backlog and give a timing, right, in the years to come. So I think we have a stable backlog. I think that's what we can tell you. It's aligned with the current sales that we are generating. We had 70% on the defense side. So we have a strong backlog on that side. And as the commercial market is picking up, we'd see the firm order coming back in the backlog.
Yes. And what you need to appreciate, Nauman, and what we try to emphasize during our AGM also is our diversification. The sales diversification at Héroux-Devtek, we're present in every market segment of the aerospace industry, which is a strength of our company and our business model, as we speak.
Okay. That's great color. And maybe just last one from my end. You've utilized some of your NCIB, but on the M&A landscape, if you could provide some color, what's the landscape like? Are there a lot of struggling businesses that are up for grabs? Or how do you think of that market right now?
Well, we're going to continue to have our disciplined approach. We have our list of targets. You saw a big announcement earlier last week, showing the value of the company, aerospace company. And we will continue. And if the opportunity arise, as we always said, we are ready to make the deal, but it has to be accretive to our shareholder.
Your next question comes from Benoit Poirier with Desjardins.
And congratulations for the good quarter.
Thank you, Benoit.
Thank you.
Stéphane, maybe just to come back on the margin question. Could you maybe help us to reconcile the full contribution of the CEWS in the quarter and whether it's still fair to say that these benefits were mainly offset by production inefficiencies and commercial stuff?
Yes. Again, the direct costs associated to the COVID and some, let's say, indirect costs which are difficult to quantify mostly offset what we got on the CEWS side. So there's not a net impact. It's very minimal on our EBITDA margin this quarter.
Okay. Okay. Perfect. Okay. And with respect to the organic growth opportunities, could you provide an update on the key focus programs and how we should be thinking in terms of organic growth for each business segment? And more specifically, in terms of program, I'm looking for the actuation contract with Boeing whether still expected to start in early fiscal '23 the F-18 and the MQ-25?
Yes. Well, all of those programs, Benoit, we are entering, we're generating new revenues. F-18, we had no revenue last year in the same quarter. Like I said during the AGM, there are some opportunities that we see in the spare market, which is pretty good. So we're going to try to maximize our revenue with that platform. So not only the OE business, but also the aftermarket related to that program. That could represent good opportunities for us.The CH-53K program, again, is in LRIP phase. That will be a very good program. There is some interest, as you saw in the news, from international countries, not only the United States. So the Israel order and all of the others, that would be a platform that would be successful in the future, so which is great, same thing with the Gripen E. And F-15, we're going to start delivering during the fiscal year the landing gear.Now the actuator, actuation contract that CESA won last year, we're still on plan to deliver our first product, our first article by late this fiscal year. And revenue will gradually go up as we introduce the, well, approximately 20 different actuators on 5 different programs. So it will not be all introduced at the same time, but our revenue will grow throughout the next fiscal 2023, okay, gradually go up. So we have the full steam revenue in 2024. Does that answer your question, Benoit?
Yes. That's great. And Stéphane, looking at the working cap, another good quarter in terms of working capital management, I was curious to know more how should we be thinking in terms of working capital consumption or release for fiscal year '22. And in terms of CapEx, if you could provide more color about the expectation for fiscal year '22, whether it will be comparable to last year or we should be able to see an improvement.
So in terms of working capital, I think we're on the same trend as what you have seen in the past year, right? The first semester is always lower, right, because of the vacation period in the second quarter specifically. So we had the benefit in the first quarter from the strong Q4. So we'll see a more stable working capital in the current quarter.And as we approach with our objective of reducing inventory, I think we'll see gradually the benefit in the last 6 months, right, from the level of inventory. There are still opportunities to reduce the commercial side of our inventories. That has not yet reached our target with the current level of sales. And on the defense side is essentially the increase you saw in the quarter.CapEx would be comparable to last year. So nothing major in terms of spending. And the timing, I mean, it depends on the project. So will be very comparable to last year CapEx.
Okay. And last one for me. When we look at amortization expense, $9.3 million, down from $10.9 million a year ago. Is there anything specific to highlight? And is the $9.3 million per quarter a sustainable number going forward, Stéphane?
Yes. Absolutely. Nothing to, obviously, exchange last year were pretty much higher, right? So that affected the top line, but some expenses like the depreciation. But also, we closed Alta, as you know, right? Alta now is closed. And now we have the benefit this year. And as we are closing the Wichita facility, which is on plan to be completed by the end of the calendar year, this calendar year, so we'll see another benefit, smaller though on that side. So it's pretty much, yes, the current quarter depreciation would be similar in the coming quarters.
[Operator Instructions] The next question comes from Cameron Doerksen with National Bank.
So just really a couple of questions from me. I guess, first, just wanted to talk about the military aftermarket. That's one of the things you cited as being pretty strong in the quarter. I just wonder if you can go a little bit more specifically on that. And also just talk a little bit about, I guess, the contract you have with AAR. I think the original contract was a 4-year deal. And if I recall correctly, it's up sometime in 2022. So maybe you can just talk a little bit about that relationship as well.
Well, aftermarket, we saw some spares orders, special spares order on some platforms coming from the U.S. Air Force, so on the aftermarket.
C-130.
And other things, right? So that we saw some movement there. These are orders that we won 9 months ago. Now we're starting the delivery, and we expect to continue delivering on those orders.Now AAR is always a situation. So our contract will end. But our business is much more resilient than we were before. At the time that when we had the USAF, we were much more vulnerable to that contract. So now we have a much more resilient business with long-term contract with much more value added. And we see other opportunities that we didn't see before.
Okay. So if I understand you correctly, your expectation is that, that contract will conclude, but you've got some other aftermarket opportunities. And one of the ones you cited was the F-18 spares. So I guess that's maybe something that is an opportunity to offset on that.
It's an opportunity, yes. That's an opportunity, but we never know, right? We're Héroux. We like keeping our contracts, right?
Okay. So that's yet to be determined, I guess.
Yes. That's a nice way to put it.
Okay. Second thing, just on the business jets. I know it's right now a relatively small part of your overall business. And obviously, the Dassault 6X is still kind of in early stages. But I'm wondering if you can talk about the in-production programs now. I mean, I guess, maybe mainly the Embraer business jets. What are you seeing there? The business jet market seems to be very strong and maybe there's an expectation that production rates will start to move higher.
Yes. This program surprised me, namely the Embraer, the Praetor program. Embraer is doing pretty good. We thought that the rate would reduce much more than that. So that was a good surprise during the pandemic, the resilience of that program, and we don't see a reduction.I don't expect extreme growth, Cameron, but it's still a nice program for us that brings sustainable revenue. And it's pretty good, pretty good aircraft. And they're selling and we're producing for them. So not major change pre and post-pandemic.
Okay. Okay. That's great. Just one very minor housekeeping items. You announced, I guess, the divestiture of one of the operations in the U.K. Was there any material revenue associated with that business?
No. It was not material. So that's why we didn't have to put more information as that is really not material.
There are no further questions at this -- it appears we have another question from Bryan Fast with Raymond James.
Just one question for myself. Can we just discuss what you're seeing regarding supply constraints? I think last quarter you said things were managed, but maybe that could change. Just maybe an update on what you're seeing there?
Supply chain? Is that? I didn't hear you well, Bryan.
Yes.
The solidity of our supply chain?
Correct. Yes. That's it.
So far, it has not impacted our ability to deliver. We still need to improve. We're stabilizing, like I said, our production systems. The move that we did last year were not easy moves. Now we need to stabilizing our production system, absorb all the movement. And the supply chain so far was resilient as well as us, and they're still supporting us.
Thank you. There are no further questions at this time. Mr. Brassard, you may proceed.
Yes. Thank you very much, everyone, for having joined us at our AGM and earnings call this morning. Thank you as well for your interest and ongoing support towards Héroux-Devtek. So have a great day. Thank you very much.
Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines.