Heroux Devtek Inc
TSX:HRX
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Heroux Devtek Inc
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Good morning. My name is [indiscernible], and I'll be your conference operator today. At this, I would like to welcome everyone to Héroux-Devtek's Fiscal 2021 Fourth Quarter and Fiscal Year 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, Thursday, May 20, 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's. Mr. Brassard, please go ahead, sir.
Well, thank you very much, [indiscernible], and good morning, everyone, [Foreign Language]. On behalf of all of us here in Longueuil, welcome to our fourth quarter and year-end earnings conference call for fiscal 2021. As usual, I invite you to follow along by referring to the financial statements, MD&A, press releases and presentation, which can be found in the Investors section of our website. Before we discuss our financial results and our Q4 performance, let me go back to the circumstances we were facing when we entered fiscal 2021 just over a year ago. Back then, the pandemic had started to migrate from Asia to Europe and to America. Our early experience dealing with the outbreak in Spain allowed us to roll out effective health and safety measures across all our sites, enabling us to protect our people, while entering efficiencies of production facilities. Beyond health and safety, we also needed to adjust our production capacity to the new market demand. Given the market outlook where twin-aisle aircraft were expected to be strongly impacted. We swiftly decided to implement restructuring initiatives including a 15% workforce reduction, the closure of 2 manufacturing sites and reallocating production where warranted. By doing so, we reduced both our fixed and variable costs, and we were able to uphold our commitments to our clients across all programs. Now our short-term objective is to absorb future growth with our current production capacity and cost structure. We also focus on optimizing working capital. As a result, inventory levels have now returned to pre-pandemic turn rates, and we still have room to improve. From the early days of the pandemic, we also continued to put our customer first. Our dedication of doing our best for them paid off. We were added to the Boeing's Premier Bidder Program testifying our sustained level of high-quality performance. We secured a new long-term contract for CESA with Boeing. And we were selected by Dassault for their new Falcon 10X program. Financially, our efforts throughout the year produced results that speak for themselves. We finished the year with $571 million in sales, down 6.9% from the previous year. We achieved a record year in terms of free cash flow at $67 million compared to $30 million the year before. Before I invite Stéphane to discuss our Q4 and fiscal 2021 results in greater detail, I wish to comment on our normal course issuer bid announcement earlier today. In our view, and this is for something that we have just mentioned a few times on recent calls. Market price do not fully reflect the underlying value of Héroux-Devtek. We believe that repurchasing up to 2.4 million shares at recent market price will generate immediate value for our shareholders. This being said, our acquisition ambitions remain unchanged, and we are prepared to seize opportunities as they arise. For the time being, we are comfortable with our current debt leverage ratio, especially as we have no capital repayments required on our credit facilities until December 2024.Now on to our results, 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 Q4, consolidated sales decreased 7.1% to $155 million from $166.8 million last year. Defense sales were up a strong 13.1%, while Civil sales were down 33.7%, reflecting the 45% decrease in OEM demand for twin-aisle programs. For the full year, sales were down 6.9% to $570.7 million from $613 million last year, as a 14.6% growth in defense sales partly offset the 31.9% decrease in the Civil Market segment. Operating income in the fourth quarter reached $12.2 million, up from a loss of $64.4 million last year. When we had recorded $82 million of impairment charge. In the full year, operating income reached $34.1 million compared to a loss of $30.1 million the year prior. Adjusted EBITDA, which exclude nonrecurring items, stood at $25 million in Q4 or 16.1% of sales, compared to $28.6 million or 17.2% of sales last year. The decrease was mainly due to lower volume and the negative year-over-year foreign exchange impact, representing $1.7 million or 1.1% of sales. For the fiscal year, adjusted EBITDA stood at $88.3 million or 15.5% of sales compared with $96.2 million or 15.7% of sales last year also due mainly to the lower volume and the negative foreign exchange impact. Finally, results per share grew to earnings of $0.24 in Q4, compared to a loss of $1.98 last year. Excluding onetime charge, the adjusted EPS reached $0.28 compared to $0.38 last year. For the full year, results per share grew to earnings of $0.55 compared to a loss of $1.38 or decreased to $0.80 from earnings of $1 last year on an adjusted basis. Let's now turn to our financial position. As at March 31, 2021, our net debt stood at $157.5 million, down a substantial $89.3 million from $246.9 million a year prior. The decrease in net debt is mainly related to strong cash flow generation over the 12 months period, resulting from solid working capital management. As a result, our net debt to adjusted EBITDA ratio stood at 1.8% as at March 31 versus 2.6% a year ago. Back to you, Martin.
Thank you, Stéphane. For fiscal 2021 has kept the entire management team on its toes and allowed our employees to demonstrate their resilience. To our employees, thank you for being so committed and engaged towards the success of Héroux-Devtek. You make us very proud. To our dedicated board member, thank you for your guidance and support in these dire times. And to our shareholders and members of the financial community, thank you for your trust. We really appreciate your loyalty, your insights and shared enthusiasm. And as for the road ahead, we can start thinking of a recovery with prudent optimism. Travel will resume, and our clients will need our products. We are in strong financial position, capable of investing both internally for new projects, and also for the right acquisition that would complement our product offering and strengthen our position as a world leader in the markets we serve. [indiscernible], we are ready to answer questions.
[Operator Instructions] The first question comes from Konark Gupta with Scotiabank.
So I wanted to ask you maybe first on margin. Margin came in pretty strong at 16%. And it's been kind of recovering nicely since we hit the pandemic here. I wanted to understand how sustainable do you think is the 16%, especially as the government support programs paid out over time. And also, if you can help us strip out the government support contribution this time, it seems like it came down nicely from last quarter.
Government support was $2.2 million in terms of the Dassault's fourth quarter. So this is all offset by all the costs we had due to the pandemic. So you can imagine that the fixed cost impact for us is huge. So -- but the direct costs essentially represent also about $2.2 million. So in terms of margin, I think obviously, with the volume we had this quarter, $155 million, this drives the margin up. So that's good. And you need to look at it, I think the same way we've been explaining the results in the past 3 quarters, whereas we are looking at a stable production system for the last 2 quarters, we just did and the for next quarter to come. And margin should be between 15% and 16%. So that has been the message, and it remains the same thing. Does that answer your question, Konark?
Yes. No, it does. Absolutely. And then you didn't guide or provide guidance this time for this current fiscal year. I'm wondering as to would you need sort of more visibility on certain factors before you guide or you're not likely to guide this time given what's happening today? And even if you're not guiding directionally, if you can help us understand the commercial business is also kind of down 30% or so last year. Defense is kind of ramping up a few programs. So directionally, should we be expecting the overall revenue to be up in the current fiscal year? And how do you look at the ramp-up in those programs?
Yes. We said that after Q2, during the call on Q2, Konark, we said that expect stable revenues and stable profitability for the next 6 quarters. So that's for the -- this fiscal year, we don't see improvement or growth or substantial growth. We're going to be in the neighborhood of this year. We're going to manage our business carefully with the cost structure. And this year will be to implement initiatives to make us more productive. Last year, it was a year of movement where we had to relocate production from one side to another. There was a lot of disruption in our production system. This year, we're stabilizing the production system. We want to reinitiate our production initiatives like automation, like eliminating waste, eliminating reworks in our cost structure and we will be ready when traffic will resume. So when you look at the report traffic, domestic traffic will [indiscernible] first. And then international traffic where we are present with our 777 and twin-aisle product portfolio will resume later on. Now the vaccine rollout is going well. That's why I say that we see the future with prudent optimism. So -- but again, at Héroux-Devtek, you know that if you like aerospace, investing in Héroux-Devtek, that gives you we're present in most of all market segment and subsegment. So we're going to be managing. We reduced our cost. We stabilized our production system. Now it's optimization, and we will be ready when the market demands, Civil market demand comes back.
Okay that's great. And then last one for me. You just announced a normal growth issuer bid this morning for up to 10% float. And just kind of this is a hypothetical question, I guess. If you end up repurchasing 2.4 million shares at the current stock price, wondering how much liquidity or capital do you think you have available to you if there's a big M&A that comes to you? Like how much are you -- what's your flexibility on the balance sheet side?
Well, as you know, we had a good year of cash flow generation. And we see that it will be a good year in fiscal 2022, maybe not to the magnitude of this year. It's a record here at $67 million of free cash flow. So we'll use the free cash flow we're generating essentially to repurchase the stock. So whatever the leverage you see today, I mean, we have the flexibility with the current balance sheet at March 31, and we foresee this balance sheet position to either improve or stay at the same way it is at the end of March.
Your next question comes from Tim James with TD Securities.
Congratulations on a good year, given everything that's been happening in the background. Just wondering if you can give us a bit of an update on -- and I realize this maybe isn't front and center, but kind of the M&A landscape. And if you're seeing any fallout in terms of competitors or potential targets because of what has occurred over the last kind of 4 or 5 quarters?
Yes. Not yet, not in terms of M&A, but could be for internal growth, but not in terms of M&A. There are a lot of -- as you noted, there are a lot of money in the market today. And it's confirmed by many industry specialists. So the company are not distressed yet to be sold or to have some M&A activities. So we haven't seen very little. We have seen very little M&A activity from distress company and then you have the family company, the private company, that would want to have the value that it was pre pandemic. So they want to do a transaction on whatever normalized EBITDA or whatever. So we need to land an accretive transaction. And you will have big companies that will have asset that could be no longer whatever noncore. So we're looking at all of that. So we're vigilant. We're looking at all of that. And if there's -- we're ready with -- like Stéphane said, we have a strong balance sheet. We have good shareholders. And like I said in my closing remarks, we're ready to invest our strong financial position, either on internal growth projects or the right acquisition.
Do you think that sort of lack a wave of M&A opportunities is because there's been so much financial support from governments around the world for those companies that maybe would have otherwise been distressed? And so you've got those companies that are getting [ wrapped ] up. And then you've got other companies like yourselves that just came into this with a strong balance sheet and had the ability to withstand. Is that what -- it's sort of as simple as just there's been so much government support for companies that otherwise [indiscernible]?
Absolutely, Tim. That's for sure is the biggest factor. But there's also, the bank react pretty well to the situation, right? So the financing banks gave a lot of -- how do I say that, how do I -- breaks or -- and then the money with capital risk also funds, the money available, it's -- there's a lot of money. But yes, the government support was a great factor, a great contributor.
Okay. And my final question, looking at CESA, and I realize the last year hasn't really been a normal year in terms of being focused on sort of capitalizing on new opportunities. But I'm just wondering, now that it's year-end, if you could give us a bit of an update on some of the opportunities that either have come or that you see now as you look forward from having that business, and I realize it's been a couple of years now, but I'm just thinking about having their actuation and flight control systems expertise under the -- as part of Héroux-Devtek, just kind of the opportunities that maybe have come out of that or new ones that you've seen since or over the last 12 months?
Yes. Well, right now, we're busy industrializing our contract. The large contract for actuators. That's a big piece of work that we are doing. So the teams are -- we don't want to fail. We want to deliver and meet ahead of customer requirements and exceed customer expectations. That's for sure. However, I need to say to you that, yes, we are seeing -- we're being presented with other opportunities for that business also. It could be from external customer, and it could be also that complement our offer in our new products, right? We're winning landing gear system like the Dassault Falcon 10x. So that adds something to our product portfolio also.
We have a following question from Cameron Doerksen with National Bank.
So a question on the Civil side of the business. I'm just thinking about kind of the next 12 months. I'm just wondering if you can talk a bit about the puts and takes there. I guess, at the end of the day, I'm trying to understand if we've kind of found a trough here for the Civil side of the revenue. Obviously, we know what 777 production rate is now fairly stable. But is there anything else in there that's either negative or positive in Civil that will impact revenue in 20 -- in your fiscal 2022.
Yes. Thank you, Cameron. The large jet, like the 777, you hit it, you nailed it. I think we saw the bottom in the last due for delivery. Yes, why do you think, Stéphane we are at the bottom of the 777, 777X, unless they announce something that we don't know, and you don't know. Business jet was resilient. I was surprised with the business jet. And the market seems to be resilient, and it seems to have some activity there. So we're seeing some orders coming in. And the regional jet, we're not very much present, as you know, so -- because we have a contract with Embraer again there. So it's stable. so for the near term, I don't see a decline, nor an increase. Would you say so, Stéphane?
Yes. I think you need to look at it, Cameron, as globally, right? We're trying to give you a view of the total sales. So there's some up on the defense side, but there's some down on the Civil side. And we're not going to do the A-220 any more the CCRE. So it's -- we have completed our [indiscernible] . So there's some -- there's some minus in there. But overall, we are expecting an overall stable level of sales that's.,,
Yes. Stéphane just touch on the point, Cameron, the termination of the contract with Alta. So we aren't going to see these sales next year.
Right. And how about the work you're doing on the A-320 as a subcontractor? Has anything changed there?
Same thing. It's in process of repatriation. So it was expected. When we did our numbers, last year, we were trying to see our vulnerability and anything that was related to the -- to a tier, let's say, a Tier 1 delivery, right, and not selling to OEM, we're expecting some softness there. And yes, this will materialize. That's why there is some upside, obviously, all the 53K is ramping up. The F-18 will have the full year. The F-15 is starting this year. The Gripen a little bit of an increase, but not that much for fiscal '22. So that's the upside of the hands. And on the other hand, you have the downside of a couple of programs that I mentioned on the Civil side.
Okay. That's helpful. And just a second question. I'm just wondering if you can talk a bit about your working capital requirements for fiscal 2022 and as well as -- and CapEx, I mean your inventory has come down quite a lot over the last 12 months. Just wondering what your expectations are, should we expect working capital to be kind of stable? And also, what about CapEx?
Yes. Well, first, we're very proud of the achievement of that thing, $25 million reduction in 1/4 of inventory is a big achievement. This required a lot of efforts from all our business unit. So now we have realigned this with where we were before the pandemic in terms of turns of inventory. So faster than what I had in the plan. So now I expect this to be pretty much stable over the year. So we'll work hard to see if we can optimize it, but prudently, I would guide you to be prudent on further reduction on working capital.
Okay. And CapEx?
CapEx will remain about the same level than what we had this year. So it's not expecting big thing. Our product. We -- that I mentioned, we are introducing they do not require significant CapEx, and it's within the parameter we have. So -- and I think it will be slightly lower, but it's going to be to the magnitude that we had this year.
Your next question comes from Benoit Poirier with Desjardins Capital Market.
Congratulations for the strong finish. Just to come back on commercial. Obviously, outlook seems to be pretty stable with some ups and down. But given the termination of the contract with Alta and given the build-to-print nature, would it be fair overall to expect some margin improvement for Civil in fiscal '22 given those ups and downs?
I'll say like, Stéphane, you need to look at globally, right? So it would be fair to have similar margins as this year, right? So that's our goal. That's our target. And Stéphane already gave some color. I didn't [ earn ] your question, Benoit, but we aren't going to say much more than this is. Right, Stéphane?
Yes. And you see, for us, focus is on -- like Martin said, optimizing for the group, right, we don't add resource after for the growth. I mean, there's going to be expansion in margin in the following years with the growth to come.
Okay. Okay. That's great. And could you maybe quantify the benefits we still might see from the restructuring efforts in fiscal '22?
Yes. Well, I can't comment on where we are. So we're about 13% workforce reduction some 15% that we are expecting. So there's the Wichita site that is going to be closing. By the end of this calendar year. So we have some production order to complete with our main customer over there. And if you look at the results of the fourth quarter and you exclude the effect of the grant, we're 12% lower in terms of the labor cost compared to last fourth quarter. So and -- so will the full benefit of the extra 2%, it would bring a bit more than 12% of cost savings, and we'll have the full benefit after the closing of Wichita, right? So it's going to be pretty stable, the first 6 months compared to what we had in the last quarter and then after the foreclosure of which it will have the last benefit on the labor cost saving.
Okay. And for defense, you gave us some great color about the programs that will be ramping up the 53K, F-18 and F-15 and Gripen. So what should we expect in terms of potential growth this year, Stéphane, on defense side?
So again, I'm looking at it globally, right, together. So globally, it's a production system that we are stabilizing, that we're expecting similar level of what we had this year. And there's going to be plus and minus between defense and commercial, as I explained earlier because there is some -- we are expecting a lower civil sales in fiscal '22 for the reason I mentioned before, and then defense will offset this decrease.
And again, Benoit, just to give more color on the sales profile. It's going to follow like summer, second quarter will be lower because of shutdowns, right? First quarter will be lower than the fourth quarter, but Q3 and Q4 sales profile should be like historically.
Okay. And looking at the fighter aircraft, this is still an important element. There has been a lot of marketing campaigns on top of new aircraft, new generation that are being developed. Could you talk a little bit about the outlook for fighter aircraft and your expectation for the next 3 years?
Fighter aircraft is the second largest sub-market segment in the industry. And given the geopolitical situation, climate and the state of the fleet that different countries have they're operating old fleets. So we are expecting fair demand into -- with that market segment. Obviously, you have the F-35, a fifth-generation aircraft that lead the way, but also F-18 and F-15 and Gripen. Gripen is a new program, but the other 2 are getting some more legs and they're seeing second lines, either through the budget of United States and also from international campaigns. So we're well positioned on these as we produce or as we present on all these 4 platforms, and there's also the Eurofighter in Europe. So -- and also, there's some development program also in Europe. And we are well located, very well-located because we're in Spain. Which part of the Europe. And we also, in the U.K., which part of the U.K. So these 2, let's say, countries are also looking to develop new aircraft. So yes, we see, and that's why we've been able to minimize the impact on our business from the pandemic. So -- and we continue and like we always said also, but I want to give you more color. When we win a contract like that, like an F-18, we see -- now it's -- we need to develop the aftermarket market, right? So we need to go and get some more market shares with that using our OE position and to obtain aftermarket revenue.
Your next question comes from Bryan Fast with Raymond James.
Can we just discuss what you're seeing regarding supply constraints? Is this impacting current operations? And if so, do you have visibility in improvement there?
Supply chain, that was an area last year that was very worried about, very, very worried about. And the supply chain surprisingly, performed well. We haven't seen major disruption in their supply. We start to see in the Q4, we start to see some weakness there. I believe it's prudent to say it will happen. From where? I don't know, but we're watching and we're monitoring the supply chain activity.
Okay. And then maybe are you seeing any cost pressures, whether it be for materials or labor?
Material, there are some material that there are some cost pressure and so. So we need to, again, use our negotiation skills. As to the labor, it's pretty stable, right, Stéphane?
Yes.
Thank you all for listening and thank you for your interest that you have for Héroux-Devtek. And like I said, we truly appreciate the relationship we have with all of you. Thank you. Operator back...
Ladies and gentlemen, this concludes today's conference call. You may now disconnect.