Heroux Devtek Inc
TSX:HRX
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Heroux Devtek Inc
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Good morning. My name is Joanne, and I'll be your conference operator today. At this time, I would like to welcome everyone to HÉROUX-DEVTEK's Fiscal 2021 Second 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 the Slide 2 of the accompanying presentation available on the company's website for the complete forward-looking statement.I would like to remind everyone that this conference call is being recorded today, Friday, November 13, 2020, at 8:30 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, Joanne, and good morning, everyone. [Foreign Language]. On behalf of all of us here in Longueuil, welcome to our second quarter earnings conference call for fiscal 2021. As usual, I invite you to follow along by referring to the financial statements, MD&A, press release and presentation, which can be found in the Investors section of our website.Before we discuss our Q2 performance, I want to make a few comments on our approach thus far in coping with the global health crisis and its impacts on our industry. When we witnessed the first sign of the pandemic, we knew that quick and decisive actions were required to adjust our activity to the new reality. As such, we immediately adopted through-cycle [ mindset ]. Focus on key revenue drivers, reduce our cost structure to remain profitable, protect our liquidity and seize new sales opportunities. The fact is that disciplined, prudent and rational approach has served us well thus far and will continue to guide us until a major health catalyst materializes.Now about our Q2 results. I am obviously pleased with the performance we have displayed in the second quarter, especially of our ability to generate healthy profitability and strong cash flows. As a result, our balance sheet continues to improve, while our liquidity position remains solid. Operationally, we continue to deliver on our strong backlog, which remained stable this quarter at $764 million as defense orders offset the decrease in demand for our commercial programs.In management's view, our single most important business development opportunity comes from continuing to deliver quality products to our customer and uphold our positive reputation in the market, one program and one product at a time. Last month, it enabled us to announce an important multiyear agreement between our Spanish division and Boeing for the manufacture of actuators for several commercial aircraft platforms. The contract scope will include the supply of production requirements and spare parts for the 787, 777 and 777x, 767 and 747 aircraft.Before I invite Stéphane to present an overview of our Q2 results, I want to provide you with a quick update on our ongoing restructuring efforts as originally announced in early May. As you may have read in our press release this morning, we are progressing well in the execution of our plan. Approximately 70% of planned workforce reductions were complete, and $8.7 million of related restructuring charges were incurred in the first half of the year. A few weeks ago, we made the additional decision to close our Wichita facility due to its decreasing business volume. The net cost of the closure will fit within the initially estimated $12 million of restructuring charges for fiscal 2021.Now on to our results.
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.In Q2, consolidated sales decreased 5.8% to $137.1 million from $145.5 million last year. Defense sales were up a strong 11.6% from $80.6 million to $90 million, while civil sales were down 27.5% in Q2 from $64.9 million to $47.1 million, mainly due to a 44% decrease in demand for twin-aisle programs.In Q2, gross profit decreased from $22.2 million to $21.1 million, but increased slightly as a percentage of sales from 15.2% last year to 15.4%. The slight increase is the result of a better sales mix, offset by the impact of lower volume without a corresponding decrease in fixed costs, such as depreciation, which represented a negative year-over-year impact of 0.5% of sales.Operating income in Q2 decreased to $7.1 million or 5.2% of sales from $10.5 million or 7.2% of sales last year, reflecting the $2.7 million nonrecurring item recorded during the period. Adjusted EBITDA, which exclude nonrecurring items, stood at $21.2 million in Q2 or 15.5% of sales compared to $21.5 million or 14.8% of sales a year ago.The decrease in civil demand and the restructuring charge resulted in a decrease in earnings per share from $0.18 last year to $0.11 this quarter. Excluding onetime charge, the adjusted EPS reached $0.17 and remained relatively stable compared to last year at $0.18.Let's now turn to our financial position. As at September 30, 2020, our net debt stood at $218.8 million, down $28.1 million from $246.9 million 6 months prior. The decrease in net debt is mainly related to the strong cash flow related to operating activity over the 6-month period, which totaled $30.9 million. As a result, our net debt to adjusted EBITDA ratio stood at 2.4x as at September 30 versus 2.6x 6 months ago. Finally, our available liquidity was up $35.9 million since March, sitting at $288.7 million as at the end of Q2.Back to you, Martin.
Thank you, Stéphane. Over the course of Q2, we delivered our first main landing gear shipsets for the Boeing's F-18 program. We expect substantial revenue growth from this program as going forward, we will be the sole source provider for Boeing's OEM and aftermarket needs. We are also in the ramp-up phase of proprietary programs such as the Boeing MQ-25, the Sikorsky CH-53K and the Saab Gripen E.I want to conclude my remarks by thanking our employees. As is the case for anyone joining us on this call, the pandemic has changed our lives. In spite of this reality, HÉROUX-DEVTEK employees across our different facilities have displayed great resilience and commitment. Through their know-how and focus on execution, they are among our strongest competitive advantages. We are fortunate to be able to count on such a great team, and I want to sincerely thank them.Joanne, we are now ready to answer questions.
[Operator Instructions] Your first question comes from the line of Konark Gupta.
The first one for me. The government support amount appears to have increased from last quarter. Can you help us understand what drove that? And what do you expect for the next coming quarters?
Well, essentially, compared to the previous quarter, you're right, we're at $5.3 million essentially in the quarter compared to the first quarter was more at the magnitude of $3.5 million. It's really a timing of sales when you look at the detailed rule of the subsidies. They are associated essentially to growth depending on different entity in our organization. So really, that reflects that timing where some sites are experimenting a growth, while others are decreasing their sales. So the net-net being negative. So that's the reason behind that because, as you know, the Canadian subsidy rate is gradually going down over the period.
Okay. And then once the restructuring is over and these government support payments, they kind of stop coming out, they kind of normalize to a low level, what's your margin expectation here for the business, like with the kind of volume growth environment you have today in defense and commercial has kind of stabilized, what do you see the core margin for the business in terms of EBITDA?
As you know, we don't provide guidance, right? But the second quarter is a good indication of the quarters ahead. So we have -- like we move quickly into our rationalization into assigning capacity and capability and the resource to the revenue drivers. So now we have stabilized our environment and Q3, Q4 should be following Q2 results.
Okay. And on the CESA contract, the actuator contract with Boeing, seems like it's the first one since you acquired CESA away from, obviously, Airbus. Is there any more opportunity around those contracts from other OEMs that you anticipate at this time? Or anything incremental from CESA that you can leverage with other OEMs?
Absolutely. It's our day-to-day jobs, and we have some opportunities. We have a good team in Spain. And we see some opportunities. Some went down because of the pandemic and the volume, the strategy of OEM second sourcing. It's now less urgent than before. But we still see some opportunities, and so we're still working on new opportunity there to show CESA capability. It's very well accepted on the market so far.
Great. And last one for me before I turn it over. Working capital, can you help us understand with the kind of F-18 now started to ship now, for the second half of the fiscal year, do you expect some working capital movements in opposite direction here? Like as you will see some reversal in working capital here in Q3 or Q4? Or do you see some continued requirement?
Well, essentially, we have been working very hard with the operational team on the inventory side. As you know, this was the area where we wanted to stabilize and see some more improvement. And this quarter is the start of what we see in terms of improvement for the inventory. So we certainly foresee improvement ahead in the current year on the inventory level, and it should reflect this in the working capital in the coming quarters.
Yes. This is our focus. And I just want to come back when you reassign your resource, we -- like we said, during the Q1 results, we said that it creates some turbulence in the inventory management. In Q2, we have reduced the inventory, but we -- our goal is to reduce it further.
Your next question comes from the line of Mona Nazir.
Congratulations on the quarter. Firstly, in regard to the strong defense sales, the pivot is going well. I know you could not provide guidance last quarter, but you did state that it would be fair for defense growth to be higher on a sequential basis, and we are now seeing that. I'm just wondering if the defense growth that we're seeing is sustainable at these levels and for what time period? I'm just trying to gauge if the visibility for new programs and related wins is there?
I think it's -- we take it overall, right? We have not provided guidance on the top line. So -- and when we said we adjust our cost structure with the new volume we were seeing, right, we adjusted our labor cost by 10%. So that's the best we can give you at this point. So timing of defense and the growth we have in some of our programs, at the same time, there is still some movement on the civil side. So all in all, we're giving you as much as we can in terms of information to help you looking at the top line globally, both for the commercial and defense sector.
Okay. Perfect. Much appreciate it. And then just touching on the strong margin performance. I do appreciate your comments that Q2 is a good indication of quarters ahead. But perhaps maybe another way to ask prior questioning, and it's more for my understanding. When I'm looking at the current quarter and even margin expectations going forward, would it be fair to say that it's more the elevated defense mix versus commercial? Or is it a combination of misc -- sorry, mix and the cost reduction initiatives that you've put in place?
Cost is certainly, when you look at our financial statement, exclusive of the grant accounted, our labor cost reduced by 8%. So as you know, we are on target to achieve our reduction in the cost. So the cost reduction is helping the margin so -- as we achieve those cost reductions. At the same time, yes, the product mix has a favorable impact in the quarter. And this is coming from the order we have on the -- not only on the defense side, but it's reflective of our mix of product in this quarter.
Okay. That's very helpful. And then just lastly for me. IATA continues to put out their weekly updates, and data has continued to look kind of startling. Liquidity remains a major constraint for the sector, and you guys have been faring extremely well with positive and strong, stronger actually, free cash flow. Are you starting to think now with the vaccine discussions that perhaps the tides may be turning, you could be opportunistic on the M&A front? Or is it still early days?
It's still early days, I believe, before, we have a distribution, a mass distribution and people come back. Mass distribution will not happen before the spring, right? And to see the impact, I think it's too early right now.
Your next question comes from the line of Cameron Doerksen.
So just a question on, I guess, 777 shipset deliveries in Q2. I know in Q1, you were -- delivered at a rate that was where Boeing is ultimately going. Can you just maybe discuss what it was like in Q2?
Well, we see a bit -- that's why we're trying to look at it globally and to answer your question globally, Cameron, everybody, we still see some -- we saw the biggest reduction, right, today in the first half of the year. We're still seeing some slight reduction but the material, 44%, it's still good. It accounts for not only 777, but we saw that for all the twin-aisle because, as you know, we are in the 330, the 350, and maybe I'm forgetting one, 787. So we saw that. So they still have some slight decrease that will be compensated by the orders that we got from the military or the defense sector. So all in all, that's why we try not to guide you, but to answer your question as a global -- globally.
Okay. So you're basically in Q2 kind of delivering -- or at least on the wide-body side, delivering at rates that reflect -- close to rates that reflect what we're going to look like in 2021, basically? So we were kind of -- I guess, maybe the question is better as we're -- we're pretty close to the trough.
But there's still some slight reduction to happen, Cameron.
Okay. Okay. Understood. Understood. And on your contracts -- or the contract you have with Safran on, I guess, a sort of a subsupplier to them, is there any update there? I know that, again, we've discussed this in the past, but they -- I think you're the second source on like A320 landing gear. So I'm just wondering if you can maybe discuss where things stand with them.
Again, there's some good and -- so there's some news. But again, I'm going to refer to you as globally. We did our calculation, and we account everything like that. We stabilize our production environment, and we're confident that Q2 is a good quarter to be based on.
Okay. Fair, fair enough. Maybe one other, just on, I guess, sort of outlook. I mean, you've talked about the F-18 first shipset in the quarter, so that's ramping up. When does the F-15 stuff come in? I know that was, I think, coming later than F-18, but maybe you can just remind me when that is?
Yes. Yes. So we focus our energy on industrializing F-18. We're right in the start of F-15 now. We start the industrialization process in August. And normally, it takes about 18 months to industrialize for the first shipset delivery. So you're looking at December 2021. Does that answer better your question than the previous one?
No, perfect. Perfect. No, that's helpful. And maybe just last one for me. Again, I guess, a question on business opportunities. But I see that Airbus is talking about developing a new trainer jet aircraft. And I believe your Spanish operation CESA is involved with that program. Can maybe you just discuss a little bit more...
It would be fun to win it, eh? It would be fun to win, it, eh?
Well, my understanding was that you -- CESA was already sort of involved in the development.
We're right in the middle of all the programs that happened with the CESA acquisition in Europe. We are participating in all the discussion. But again, revenue generator will come not in the short term. But yes, if you talk about the mail, the FCAS, the new trainer, so we have a good team. We're present in everything, and we're promoting the company. So yes, yes, we're actively working on these 3 opportunities there. Absolutely.
[Operator Instructions] Your next question comes from the line of Benoit Poirier.
Congratulations for the great quarter. If we look at the nice actuation contract with Boeing, so congratulations for this one. Could you talk maybe about the contribution or the boost we'll see on the backlog in the upcoming quarter?
Yes, that's a good question. But normally, we -- so it will not be a big boost because Boeing is not issuing POs over 6 year's period. They will -- we will receive a purchase order for first article production and maybe follow-on article before we see the big boost in the backlog. So -- deliveries, again, like I said to Cameron, industrializing. So we have about 2 dozens of actuator to produce. And we have some more complex than others. So the first revenue will come in probably in 18 months from now. And then the follow-on will come rapidly within the 6 to 9 months after.
As a reminder, Benoit, it's only firm order, right? That we are disclosing in our backlog. So only the PO, not the commitment we have from our customer on long-term period over many, many years. So it would be much, much larger than what we're disclosing in our financial statement.
Okay. Perfect. And when we look at the overall actuation system, obviously, CESA, Beaver was a great contributor to build up on the actuation strategy. This one is a nice contract, but you're still just scratching the surface. So any expertise you would like within -- you would like to add within actuation system either through M&A or organically. And organically, are you still working on R&D to beef up your service offering when we look specifically at actuation system?
Yes. We have a road map. We have some capability that we need to develop, like you just said, through acquisition and internally. So internally, we have R&D project that we do as we speak. And also, we're trying to win contract to develop that capabilities, absolutely. In terms of M&A, so it's still too early to tell. The activity is not yet there. But we're pursuing M&A activity to complement the capability we need to be a truly, like you said, to get deeper into that market.
Okay. And with respect to the closing of Wichita, could you talk about the overall impact on your utilization across all your facility and where most of the work will be distributed?
Well, there's a large portion that we did -- well, first, we had a lot of intercompany that we were sending to Wichita. So this work will be done in our Laval facility, right? So we're going to repatriate that production to our Laval facility and some in the supply chain. Then we have repair and overhaul with IP platform for us. That we have a site in the U.K. that does exactly the same type of work. So we will be consolidating that portion of the business with the spare procurement, right? So it's our U.K. facility that is producing the spares requirement, and they're doing also some MRO. For the rest of the portfolio, we're working with our customers to make it easy on the transition for them to not impact their requirements. So we're working as we speak with the customers.
Okay. If we look at the -- obviously, your margin, very strong performance, you kind of answered the question about the mix, but when we look inside defense, the fact that you're ramping up many programs in the short to medium term, does it penalize somewhat your EBITDA margin and as volume ramps up, obviously, margins should even trend higher when we look specifically at defense, given that you're ramping up several programs. Just wondering about the potential upside we might see from defense as you get those programs more mature.
I'll let Stéphane answer the question, but you know the answer.
But maybe to point down to what you want us to say is when you look at the start of a program, obviously, you don't reach the targeted margin on the first shipsets you deliver. So yes, we're seeing some improvement when you look at specifically on some of the program. But I think we have tried to guide you overall what we see on our business. So without giving you too much, I think it's -- we have answered globally instead of specifically on a specific program.
Well, that's great color. I appreciate, Stéphane. And when we look at the potential or still the work on inventory reduction, could you quantify maybe what you would like to see in terms of inventory reduction? And maybe give an update on the CapEx we should expect for the full year and maybe a glimpse for fiscal '22?
For this year, CapEx, we foresee it at around $15 million. So that's going to be around the number, plus or minus. So that's the number we're targeting at this point. And as far as inventory, we know we can do much better. And as we stabilize the production environment, that's what Martin has explained earlier on that, we are trying to have more stable quarter. So this will help stabilizing the overall production capacity and the level of inventory. So we think there is some reduction that will come from the reduction from the commercial sector because as we are adjusting to the new rate, obviously, there's less incoming inventory from our supply chain. And we see a reduction, but to quantify it, we know our number, but we'll let you make the only estimate.
Your next question comes from the line of Shawn Levine.
I was just hoping you could discuss the cadence of the F-18 and the MQ-25 program ramps. And maybe the time frame from kind of first shipset to hitting full run rates?
F-18 will deliver the first 2 shipsets. So it's a 12-month program plus spares. So we just did 2 during the quarter. So we started the delivery. And MQ-25 is really prototype, right? So we will increase work on this program, from the engineering side and also the delivery of the additional prototype over the quarters. The order for the MQ-25 is 7 or 11? 11, 7, 8? 8 shipset. So that's first order from...
First order, but the program -- the program expectations are much higher than this. Yes. Gripen E, we're entering, like we just said in the replace. So we're seeing a ramp-up increase there and also for the Sikorsky CH-53K, that is also entering a replace. So this is a program that could be 200 aircraft, and we're at the beginning of that.
Okay. That's helpful. So it kind of dovetails into the next question. So I mean, it sounds like with a lot of these programs ramping up, would it be fair to say that looking out to 2022, that the ramp-up of these programs and steady state on some of the others would offset any declines from programs that are winding down in defense in fiscal '22?
Yes, we have short visibility, but it would be fair. I tend to agree with you.
Okay. And then just my last question here. You guys have done a good job of adjusting the cost structure to the current market environment. Are the efficiencies that have been put in place, are those more permanent in nature? Or was it more on the variable expense side, so such that just thinking like once revenue begins to recover, how much of these cost savings that you put in place or efficiencies that you've implemented? How much are those permanent in nature and would really benefit margins once volume recovers here?
Once volume -- yes, exactly. That's the beauty of our restructuring plan. And what Stéphane said, 8% on labor -- in that labor. So you have a fixed and variable within that, but there are other expenses that will be reduced once we -- I'm thinking namely about the Alta closure, once we close Alta, so we have all the fixed expense related to that operation. And same thing with Wichita, that will help the margin in percentage also.
There are no further questions at this time. I would like to now turn the call back over to Martin Brassard.
Well, thank you very much. Thank you, everyone. Thank you very much for having joining us on this -- on this morning -- joining us on this morning. And I really want to thank all of you to ask questions and your interest towards our company. We definitely need you. We believe that the HÉROUX-DEVTEK represent good opportunity. And we will continue to make our company better. And our employees and the team of employees, you know that you can rely on us and have confidence on continue to do our job to deliver strong results. So thank you very much, and have a great day.
Thank you, ladies and gentlemen. This concludes today's conference call. You may now disconnect.