Heroux Devtek Inc
TSX:HRX
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Heroux Devtek Inc
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Good morning. My name is Jessica, and I will be your conference operator today. At this time, I would like to welcome everyone to Héroux-Devtek Fiscal 2022 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 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 12, 2021, 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, Jessica, 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 2022. 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 earnings, I would like to comment on two major announcements we made recently. On October 28, we announced a new contract with Lockheed Martin for the development of landing gears for its next generation of defense aircraft. I am quite pleased with this important agreement as it reflects very positively on the high level of expertise of Héroux-Devtek's engineering and manufacturing teams. As you may know, we have a 30-plus years relationship with Lockheed Martin, and we are delighted to be extending it with this new contract. And earlier this week, we announced a 6-year extension of our 777 -- 777X contract with the Boeing Company. The contract covers all OEM and aftermarket requirements and is another illustration of the strength of the relationship with Boeing, supporting their legacy and future landing gear needs. These two major announcements position us well to benefit from future growth in civil and defense markets. They also speak to the quality of the relationships we have built over the year and the reputation for quality we have earned among the world's leading aerospace OEMs. We are proud of the trust they have bestowed upon Héroux-Devtek and we'll spare no effort as a team to honor it. Now specifically, about our Q2 results, I am pleased to report strong growth of 9.1% in defense sales compared to last year. In the second quarter, as in every single quarter since the onset of the pandemic, our defense sales grew consistently, enabling us to mitigate the impact of lower civil production rates experienced these past 20 months. Stéphane will discuss our results in greater detail in a moment, but I wish to single out our EPS growth achieved since the beginning of the year. For the quarter, EPS grew from $0.17 to $0.20, bringing our year-to-date EPS to $0.40, an increase of 54% compared to last year, excluding nonrecurring items. Now over to 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. In Q2, consolidated sales remained stable year-over-year at $137 million when excluding the negative impact of foreign exchange rate fluctuations, totaling $5.8 million or 4.2% of sales. Including negative foreign exchange fluctuations, defense sales reached $94 million, up from $90 million last year, driven by the ramp-up of the delivery under the Sikorsky CH-53K program, Boeing F-18 and MQ-25 program. This performance was partially offset by lower aftermarket sales. Including negative foreign exchange fluctuation, civil sales were down to $37.3 million from $47.1 million last year. This decrease was driven by lower OEM demand in the large civil sector than in the corresponding quarter last year when the full impact of the COVID-19 pandemic end up entirely materialized. Second quarter civil sales were also impacted by the repatriation by customer of certain Tier 2 contract in the large commercial sector, in part offset by higher delivery for business jet program. Gross profit grew from $21.1 million to $22.2 million, up from 15.4% as a percentage of sales to 16.9%. The growth was fueled by the positive effect of restructuring initiatives on the corporation cost structure, including lower depreciation. Operating income increased to $12 million or 9.1% of sales from 7.1% or 5.2% of sales last year. Excluding nonrecurring item, operating income improved 22%, mainly due to the same factor as those previously highlighted. Adjusted EBITDA, which exclude nonrecurring item, remained stable at $21.2 million, growing as a percentage of sales from 15.5% a year ago to 16.1%. As pointed out by Martin, earnings per share stood at $0.21 this year compared to $0.11 last year, or $0.17, including nonrecurring item. The same factor as those discussed earlier drove EPS growth. Let's now turn to our cash flow and financial position. Cash flow related to operating activity reached $17.5 million in the second quarter, up from $15.4 million last year, mainly as a result of last year's cash charge related to restructuring. As of September 30, 2021, our net debt stood at $145.4 million, down $12.1 million from $157.5 million, 6 months prior. The decrease in net debt is mainly related to cash flow generation over 6 months, net of $13.5 million allocated to share repurchase under the NCIB program. Before I turn the call back to Martin for his closing remark, let me provide you with a brief update on our normal course issuer bid. As of yesterday, we had repurchased for cancellation a cumulative total of 1,096,761 common shares at an average price of $17.75 per share, representing an aggregate cost of $19.5 million. As mentioned before, NCIB represents a flexible method of optimizing capital allocation and providing immediate value to shareholders without compromising our ability to pursue future growth initiatives. Back to you, Martin.
Thank you, Stéphane. Let me conclude our remarks by reiterating our continued focus on execution. We have a solid plan in place that is both yielding results quarter after quarter, while positioning us favorably in the longer term. We remain ready to seize growth opportunities via acquisition, but are maintaining our disciplined approach in selecting targets. We also continue to pursue business opportunities across all of our market segments. And we are well positioned, thanks to the strong relationship we have with the aerospace OEMs. The recent Lockheed Martin and Boeing announcements are an excellent illustration of that ambition. Jessica, we are now ready to answer questions.
[Operator Instructions] Your first question comes from Konark Gupta with Scotiabank.
So congrats on good results. It seems like margins is my first question. Margins are heading in the right direction. And it looks like you have completed 90% of the restructuring that you mentioned. I'm just wondering if there's any further upside to margin, you think, from the remaining 10% restructuring program? And then given the aftermarket was kind of weaker in the quarter in defense, if it rebounds and when it rebounds, do you think there's further upside potential in margin from that? So 16% seems like a floor to me. Is that a fair way to look at margins here?
Essentially, yes, you are right that the margin at about 16% for the year-to-date. So as volume is going up, obviously, this should help the margin to expand. I think, as you said on the restructuring side, the activity are pretty much completed. We only have now the Wichita facility that is closing this quarter. So it's a smaller site, as you know. So this will yield some positive impact, but it's obviously less material. So I think it's really volume ramping up in the coming years that will bring the margin up.
Yes. What we have done is we restructured our cost base. And our intent is to absorb the future growth with the same resources. That's our plan.
Right. Makes sense. And then with respect to the two contracts. I mean, one is like an extension perhaps with Boeing, and the Lockheed Martin is a new one. Is there -- specific to each of them, do you have anything to share with respect to what kind of capital requirement these contracts have going forward? And when do you start producing the landing gears for Lockheed Martin?
Well -- so we do not expect major capital expenditure for these two announcements. Right now, it's a prototype that we're building for Lockheed, and it will yield eventually some results but not in the short term.
Last one for me. With respect to working capital, so I think we still saw some investment here in the second quarter, noncash working capital changes. What do you think about the second half of this year. Do you see any big reversal? Or it's going to be kind of a small reversal from net neutral impact for full year?
No, I think the impact in the last 6 months should show a relatively stable net working capital. As you know, we're building up in the first 6 months -- for the last 6 months in terms of inventory. So this inventory should go down, but obviously, volume should go up. So the receivable and payable will adjust accordingly.
Your next question comes from Jean-Francois Lavoie with Desjardins.
So just wondering if you could provide an update on the ongoing ramp-up of the actuation system contract that you recently won in that year, please ?
Yes. Thank you, Jean-Francois. This contract was won last year by our Spanish operation. We have about between 15 or 20 actuation to develop. We're on plan. We will ship or we finalize about the first 4, 5 actuation, and that will bring revenue in the fourth quarter of our fiscal year. So we are ahead of the plan that we had. And that -- the industrialization of that contract is going better than planned. So we'll generate revenues in the next quarter.
Okay. That's good to hear. And then with respect to the aftermarket for the F-18, I know it was a big opportunity for you guys. So I was just wondering if these efforts are yielding some results in the near term? Or what's the visibility you have on that front for this specific program?
So we're working on many opportunities, Jean-Francois. We always said that F-18 is a landing gear that works very hard in operation. And so we see this aftermarket segment. So we're starting to see some -- we will start to see soon, some revenues in the current quarter, in the next quarters to come. And there are other opportunities that we're working on with our customers. So this program will be a winner for Héroux-Devtek.
Okay. Great. And then lastly for me, Martin, I think you mentioned that you remain on the lookout for M&A opportunities. I was just wondering if the eventual wind down of the government supports program is creating some opportunities for you if -- just wondering if the pipeline has improved in recent months?
Yes. Well, you could say that government with an s because all the governments in every country of the world supported their aerospace industry, and the bank system also did a good job. There was a lot of -- like I said in previous calls, there was a lot of money available in the market. We're starting to see some traction now as we speak. So that's why we're referring to our disciplined approach. We will need to land an accretive transaction to our shareholders, and that's what we're working on. So I'm more encouraged that -- than I -- than I was 12 months ago.
Okay. Good. And is it more opportunities on the landing side front? Or it's also on the actuation side? I'm just trying to...
We're going to look at every opportunity, Jean-Francois that fits our business plan -- that fits our company.
Okay. Perfect. And congrats for the strong margin in the quarter.
Your next question comes from Nauman Satti with Laurentian Bank.
And congrats on the quarter. So I may have missed it earlier, but what's the backlog that you have for this quarter? Or if that stopped being reported? I'm not sure on that.
It's pretty stable compared to the previous quarter. So it's -- no significant change.
Okay. Okay. So we can -- okay, we can see that. And just going to the civil side of the business. I'm just wondering the conversations that you had with clients now that we're -- the pandemic is sort of getting behind us, but I'm wondering what sort of recovery period are you guys expecting for that segment?
Well, it's -- if you look at the analyst that covers the aerospace segment, and Boeing issued their CMO also recently in the past few months, the domestic travel is coming back to historical levels. So that segment, so we start to see some increase in production rates. However, between you and I, where we are present, it's same thing. It's slower to recover. You'll see it when international traveling will come back. So it's still low traffic. Everybody is bullish on the freighter also. Is it temporary because of the cargo, the bull or things like that, but everybody believes in the cargo business. And as you know, Boeing is looking at the cargo for their 777X. So they have not announced anything yet, but that will be positive on us if they announce something on the 777X cargo. So today, we're prudent. We're still assessing that market, and that's why we're prudent with our plan, and we stay focused.
Okay. That's great color. And just maybe last one from my end. So you had this one program, which got sort of extended. I'm just wondering if there are any other organic growth opportunities that you see in the medium term that you could share or anything that is giving you some opportunity on that front? Or is the bulk of -- or the major growth should come from new contracts or M&A side?
No. We're working hard to make our company better and for the shareholders to get their return. So of course, we're always working on opportunity that fits our strategy.
And congrats on the quarter.
There are no further questions at this time. Please proceed for closing remarks.
Well, again, thank you very much, Jessica, and thank you very much, everyone, for having joined us this morning. Rest assured that we stay focused and our goal is to build a stronger company, which we'll continue to do so. So thank you very much for attending this call this morning, and have a great day.
Thank you. Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines. Thank you.